<PAGE>
As filed with the Securities and Exchange Commission on July 24, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
Registration Statement
Under
The Securities Act of 1933
USA TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 7359 23-2679963
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
200 Plant Avenue
Wayne, Pennsylvania 19087
(Address of principal executive offices and zip code)
George R. Jensen, Jr.
Chief Executive Officer
USA Technologies, Inc.
200 Plant Avenue
Wayne, Pennsylvania 19087
(610) 989-0340
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Douglas M. Lurio, Esquire
Lurio & Associates, P. C.
One Commerce Square
2005 Market Street, Suite 2340
Philadelphia, PA 19103-7015
(215) 665-9300
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Approximate date of proposed sale to the public: From time to time
after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the
following box: [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
<PAGE>
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
<TABLE>
<CAPTION>
============================================================================================
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
Title of each
class of Proposed Proposed
Securities Amount Maximum Maximum Amount of
to be to be Offering Price Aggregate Registration
Registered Registered Per Unit(1) Offering Price Fee
---------- ---------- --------------- -------------- ------------
Common Stock,
no par value .......2,200,000 shares $1.40 $ 3,080,000 $ 843.92
----------
Total...............2,200,000 shares.......................................... $ 843.92
==========
</TABLE>
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(1) This has been calculated by using the closing bid price of the Common
Stock on July 19, 2000 which is greater than the purchase price to be
paid by the Selling Shareholders of $1.00 per share.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
<PAGE>
USA TECHNOLOGIES, INC.
2,200,000 shares of Common Stock
These shares of Common Stock are being sold by the Selling Shareholders
listed below. The Company will not directly receive any part of the proceeds
from the sale. See "Selling Shareholders."
----------------
The Common Stock is listed on the OTC Electronic Bulletin Board under
the symbol "USTT." The closing bid price for the Common Stock on July 19, 2000
was $1.40 per share.
-----------------
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
PURCHASE SHARES ONLY IF YOU CAN AFFORD A COMPLETE LOSS. SEE "RISK
FACTORS" ON PAGE 6.
-------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed on the
adequacy or accuracy of this Prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is July 24, 2000.
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and, if given or
made, such information or representation must not be relied upon as having been
authorized. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which the Prospectus relates or an offer to sell or the solicitation of an offer
to buy such securities in any circumstances in which such offer or solicitation
is unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof or that the
information contained herein is current as of any time subsequent to its date.
TABLE OF CONTENTS
Prospectus Summary ....................................................... 1
Risk Factors ............................................................. 5
Use of Proceeds .......................................................... 12
Management Discussion And Analysis of
Financial Condition And Results
of Operations .......................................................... 12
Business ................................................................. 18
Management ............................................................... 28
Principal Shareholders ................................................... 37
Certain Transactions ..................................................... 41
Selling Shareholders ..................................................... 44
Market for Common Stock .................................................. 47
Description of Securities ................................................ 49
Plan of Distribution ..................................................... 61
Legal Matters ............................................................ 62
Experts .................................................................. 62
Financial Statements ..................................................... F-1
<PAGE>
PROSPECTUS SUMMARY
The following information does not purport to be complete and is qualified
in its entirety by and should be read in conjunction with the more detailed
information and Financial Statements, including the notes thereto, appearing
elsewhere in this Prospectus. Prospective investors should consider carefully
the factors discussed below under "Risk Factors".
The Company
Our Company, USA Technologies, Inc., a Pennsylvania corporation, was
founded in January 1992. We are an owner and licensor of automated, credit card
activated control systems for use in connection with copying machines, debit
card purchase/revalue stations, facsimile machines, personal computers, and
computer printers. Our customers are hotels, university libraries, public
libraries and retail locations. We generate revenues primarily from the sale of
equipment utilizing our control systems, from retaining a percentage of the
revenues generated from all credit card transactions conducted through our
control systems, and from monthly administrative fees paid by various locations
utilizing our control systems.
Each control system operates as follows:
- The consumer swipes a valid credit card through the control system.
- The control system transmits the request to the credit card
processor.
- The credit card processor verifies that the credit card is valid and
authorizes the transaction.
- The control system activates the equipment for use by the consumer.
- Once the consumer finishes using the equipment, the control system
transmits a record of the transactions to our computer center.
- The transaction information collected from all of the installed
control devices is transmitted by us to the credit card processor.
- The credit card processor electronically transfers the proceeds
derived from these transactions, less the credit card processor's charge, to us.
- Finally, we forward a check to each location representing its share
of the proceeds.
As of March 31, 2000, we had a total installed base of 1,321 control
systems, distributed as follows: 1,122 Business Express(R) or MBE Business
Express(TM) control systems, 75 Business Express(R) Limited Service (LSS)
control systems, 36 Copy Express(TM) control systems, 27 Debit Express(TM)
control systems, 11 Fax/Printer Express(TM) control systems, 42 Public PC(TM)
control systems and 8 TransAct(TM) control systems located at various hotels and
libraries throughout the United States and Canada. The total Business Express(R)
or MBE Business Express(TM) or LSS locations as of March 31, 2000 is 352.
1
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Our executive offices are located at 200 Plant Avenue, Wayne,
Pennsylvania 19087. The telephone number is (610) 989-0340. Our website is
located at http://www.usatech.com.
Where to Get More Information
Our Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Commission.
Such reports, and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at the
Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices located at 7 World Trade Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can
also be obtained at prescribed rates from the Public Reference Section of the
Commission, Washington, D.C. 20549 or by calling the Commission at
1-800-SEC-0330. In addition, registration statements and certain other filings
made with the Commission through its Electronic Data Gathering, Analysis and
Retrieval System are publicly available through the Commission's site on the
Internet's World Wide Web, located at http://www.sec.gov.
We will provide a copy of any or all documents incorporated by
reference herein (exclusive of exhibits unless such exhibits are specifically
incorporated by reference therein), without charge, to each person to whom this
Prospectus is delivered, upon written or oral request to USA Technologies, Inc.,
200 Plant Avenue, Wayne, Pennsylvania 19087, Attn: George R. Jensen, Jr., Chief
Executive Officer (telephone (610) 989-0340).
The Company will furnish record holders of its securities with annual
reports containing financial statements audited and reported upon by its
independent auditors, quarterly reports containing unaudited interim financial
information, and such other periodic reports as the Company may determine to be
appropriate or as may be required by law.
2
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Securities
Securities Offered ..................... Up to 2,200,000 shares of
Common Stock by the Selling
Shareholders.
Common Stock Outstanding
as of March 31, 2000 .......... 13,083,732 shares. On a fully
converted basis, there would be
20,579,361 shares outstanding
consisting of 3,452,250 shares
issuable upon exercise of the
Warrants issued in November and
December 1999 ("1999-B
Warrants"), 1,637,200 shares
issuable upon conversion of the
Senior Notes ("Senior Notes"),
125,400 shares issuable upon
exercise of Warrants issued in
August 1999 to a consultant
("Consultant Warrants"),
1,003,007 shares issuable upon
exercise of 991,267 options to
purchase Common Stock and 11,740
Common Stock Purchase Rights
(collectively "Management
Options"), 100,000 shares
issuable upon exercise of the
Warrants issued to affiliates
and/or consultants to GEM
Advisors, Inc. in June 1997,
15,000 shares issuable upon the
exercise of the Warrants issued
in June 1999 ("1999-A
Warrants"), 5,000 shares
issuable upon the exercise of
the Warrants issued August and
September 1998 ("1998-B
Warrants"), 4,000 shares
issuable upon the exercise of
the Warrants issued in January,
February and March 1998 ("1998-A
3
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Warrants"), 1,500 shares
issuable upon exercise of the
Warrants issued in April, May
and June 1997 ("1997-Warrants"),
4,000 shares issuable upon
exercise of the Warrants issued
in January and February 1997
("1996-B Warrants"), 86,800
shares issuable upon exercise of
the Warrants issued in 1996
("1996 Warrants"), 67,300 shares
issuable upon the exercise of
the Warrants issued by the
Company in 1995
("1995-Warrants"), 595,027
shares issuable upon conversion
of the Series A Convertible
Preferred Stock ("Series A
Preferred Stock"), and 399,145
shares issuable upon conversion
of accrued and unpaid dividends
on the Series A Preferred Stock.
As of July 12, 2000, on a fully
converted basis, there would be
20,769,860 shares outstanding.
Series A Preferred Stock Outstanding as
of March 31, 2000 ........... 595,027 shares. Each share of
Series A Preferred Stock, no
par value, of the Company is
convertible by the holder
thereof at any time into 1
share of Common Stock. The
holders of Series A Preferred
Stock are entitled to an annual
cumulative cash dividend of
$1.50 per share. At the time of
conversion, all accrued and
unpaid dividends are converted
into Common Stock at the rate of
$10.00 per share. See
"Description of Securities -
Series A Convertible Preferred
Stock."
4
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RISK FACTORS
The securities described herein are speculative and involve a high degree
of risk. Each prospective investor in the Common Stock should carefully consider
the following risk factors inherent in and affecting our business and the
Common Stock before investing in the Common Stock.
1. Limited Operating History; Significant Cumulative Operating Losses;
Auditor Report Modification for Going Concern. From inception through March 31,
2000, our Company has generated funds primarily through the sales of its
securities. The auditor's report at June 30, 1999 includes a modification that
indicates that the Company's existence may be dependent on its ability to
continue to raise capital and generate sufficient revenue from operations. See
"Consolidated Financial Statements."
Our Company installed its first product, the Golfer's Oasis(TM) in June
1994. This product line did not achieve the anticipated market acceptance and
was also very capital intensive. There are currently no units in operation and
revenues were nominal. The Copy Express(TM) was first installed in January 1995,
and as of March 31, 2000, there were 36 units in operation. The Credit Card
Vending Express(TM) was first installed in March 1995, and as of March 31, 2000,
there were no units in operation. The Fax Express(TM) was first installed in
February 1997 and as of March 31, 2000 there were 11 units in operation and net
revenues were nominal. The Company's Debit Express(TM) was first installed in
April 1995, and as of March 31, 2000, there were 27 units in operation and net
revenues were nominal. The Public PC(TM) (formerly known as the Credit Card
Computer Express(TM)) was first installed in April 1996, and as of March 31,
2000, there were 42 units in operation and net revenues were nominal. The
Business Express(R) was first installed in September 1996, and as of March 31,
2000, there were 352 Business Express(R) or MBE Business Express(TM) units in
operation (containing 1,122 control systems). Although the MBE Joint Venture was
established in September 1997, as of March 31, 2000, 203 MBE Business
Express(TM) units were sold. The MBE Joint Venture was terminated in May 1999.
See "Business-Legal Proceedings."
5
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For its fiscal years ended June 30, 1999, 1998, and 1997 our Company
incurred operating losses of $3,651,624, and $3,568,281, respectively. From its
inception on January 16, 1992 through March 31, 2000, we have incurred operating
losses of $25.6 million.
As of March 31, 2000, our Company had working capital of approximately
$4,070,400, of which $1,117,375 was invested in inventory. At March 31, 2000, we
had cash of $3,385,430. We anticipate generating additional cash to finance
future operating expenses by selling additional securities and through increased
revenues primarily through resale of equipment utilizing our control systems. As
of March 31, 2000, there were an aggregate of 1,321 of our control devices at
locations in the United States. We have an limited operating history upon which
an evaluation of future prospects can be made. Such future prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered in the establishment of a new business. There is currently no basis
upon which to assume that our business will prove financially profitable or
generate more than nominal operating revenues. In addition, there can be no
assurances that we will be able to continue to sell additional securities. If we
fail to generate increased revenues or fail to sell additional securities,
investors may lose all or a substantial portion of their investment.
2. Dependence Upon Key Personnel. Our Company is dependent on certain
key management personnel, particularly its Chairman and Chief Executive Officer,
George R. Jensen, Jr. The loss of services of Mr. Jensen or other executive
officers would have a material adverse effect upon our Company's business. The
Company entered into an employment agreement with Mr. Jensen that expires in
June 2002. The Company also entered into employment agreements with other
executive officers, each of which contain non-compete agreements. We have also
obtained a key man life insurance policy in the amount of $2,000,000 on Mr.
Jensen, and a key man life insurance policy in the amount of $1,000,000 on our
Vice President-Research and Development, Haven Brock Kolls, Jr. We do not have
and do not presently intend to obtain key man life insurance coverage on any of
our other executive officers.
3. Uncertainty of New Product Development; Unproven Commercial
Viability. While a number of products or services such as gasoline and public
telephones are currently provided through unattended, credit card activated
terminals, the commercial viability of any of our products has not been
established. Although commercial production and installation of our products has
commenced on a very limited basis, there can be no assurance that our products
will be successful or become profitable. In addition, there can be no assurance
that the demand for our products will be sufficient to enable us to become
profitable. Even if our current products would prove to be commercially viable,
there can be no assurance that they can evolve or be improved to meet the future
needs of the market place. In any such event, investors may lose all or
substantially all of their investment in our Company.
4. Dependence on Proprietary Technology; Patent Issues. Our Company's
success is dependent in part on its ability to obtain patent protection for its
products, maintain trade secret protection and operate without infringing the
proprietary rights of others. To date, we have pending patent applications, and
intend to file applications for additional patents covering our future products
although there can be no assurance that we will do so. In addition, there can be
no assurance that we will maintain or prosecute these applications. The United
States Government granted us eight patents as of June 30, 2000. See "Business -
Patents, Trademarks and Proprietary Information." There can be no assurance that
any of the remaining patent applications will be granted to us, that we will
develop additional products that are patentable or do not infringe the patents
of others, or that any patents issued to us will provide us with any competitive
advantages or adequate protection for our products. In addition, there can be no
assurance that any patents issued to us will not be challenged, invalidated or
circumvented by others. There can be no assurance that any of our products would
not infringe the patents of others. If any of the products are found to have
infringed any patent, there can be no assurance that we will be able to obtain
licenses to continue to manufacture and license such product or that we will not
have to pay damages as a result of such infringement. Even if a patent
application is granted for any of our products, there can be no assurance that
the patented technology will be a commercial success or result in any profits to
us. See "Business-Legal Proceedings."
6
<PAGE>
5. Competition. There are companies presently offering automated,
credit card activated control systems in connection with facsimile machines,
personal computers, debit card purchase/revalue stations, and use of the
Internet and e-mail which are in direct competition with our Company's products,
including the Business Express(R) and Public PC(TM). See "Business-
Competition." In addition, the businesses which have developed unattended,
credit card activated control systems currently used in connection with gasoline
dispensing, public telephones, prepaid telephone cards, ticket dispensing
machines, or vending machines are capable of developing control systems in
direct competition with our Company. Many of these businesses are well
established, have substantially greater resources than our Company and have
established reputations for success in the development, sale and service of high
quality products. Such competition may result in lower percentages of gross
revenues being retained by our Company in connection with its devices, or
otherwise may reduce potential profits or result in a loss of some or all of its
customer base. To the extent that our competitors are able to offer more
attractive technology, our ability to compete could be materially and adversely
affected. We are also aware of several businesses which make available use of
the Internet and use of personal computers to hotel guests in their hotel rooms
on an as-needed basis. Although these services are not credit card activated,
such services would compete with the Company's Business Express(R), and the
location may not order the Business Express(R), or if ordered, the hotel guest
may not use it.
6. Dependence on Third-Party Suppliers. Our Company is dependent on
third-party suppliers for the various component parts of its products. Although
we believe there are alternative sources for these component parts, the failure
of such suppliers to supply such component parts or the absence of readily
available alternative sources could have a material adverse effect on our
Company, including delaying the implementation of our business plan to
achieve profitability. We do not have supply contracts with any of such
third-party suppliers and we intend to purchase components pursuant to purchase
orders placed from time to time. See "Business-Procurement".
7. Cash Dividends Not Likely. There can be no assurance that the
proposed operations of our Company will result in significant revenues or any
level of profitability. Any earnings which may be generated by our Company would
be used, for the foreseeable future, to finance the growth of our business.
Accordingly, while payment of dividends rests within the discretion of the Board
of Directors, no cash dividends on the Common Stock or Series A Preferred Stock
have been declared or paid by us to date, and the Company does not presently
intend to pay cash dividends on the Common Stock or Series A Preferred Stock for
the foreseeable future. Although we paid a special stock dividend in August 1995
consisting of one-third of a share of Common Stock for each share of outstanding
Series A Preferred Stock, there can be no assurance that cash dividends will
ever be paid on the Common Stock. Our Articles of Incorporation prohibit the
declaration of any dividends on the Common Stock unless and until all unpaid and
accumulated dividends on the Series A Preferred Stock have been declared and
paid. Through March 31, 2000, the unpaid and cumulative dividends on the Series
A Preferred Stock equal $3,991,449. The unpaid and accumulated dividends are
either payable in cash by our Company when and if declared by the Board of
Directors or may be converted into shares of Common Stock at the rate of $10.00
per share. Through March 31, 2000, $2,046,373 of unpaid and cumulative dividends
on the Series A Preferred Stock were converted into 2,002,697 shares of Common
Stock. See "Description of Securities - Series A Convertible Preferred Stock."
7
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8. Need For Market Acceptance; Location Risk. There can be no assurance
that demand for our Company's products will be sufficient to enable us to become
profitable. Likewise, no assurance can be given that we will be able to install
the credit card activated control systems at enough locations or sell equipment
utilizing our control systems to enough locations to achieve significant
revenues or that our operations can be conducted profitably. As of March 31,
2000, an aggregate of 1,321 control devices have been installed at commercial
locations and revenues have been small. Alternatively, the locations which would
utilize the control systems may not be successful locations. In such event, our
revenues would be adversely affected. We may in the future lose locations
utilizing our products to competitors, or may not be able to install our
products at competitor's locations. Moreover, even if our current products would
prove to be commercially viable, there can be no assurance that they can evolve
or be improved to meet the future needs of the market place.
9. No Current Established Trading Market; No Assurance of Active
Public Market. The Common Stock is currently traded on the OTC Electronic
Bulletin Board. Although there is limited trading in the Common Stock, there is
no established trading market. Unless and until there is an established trading
market for the Common Stock, holders of the Common Stock could find it difficult
to dispose of, or to obtain accurate quotations as to the price of, the Common
Stock. See "Description of Securities - Shares Eligible For Future Sale" and
"Market For Common Stock."
10. Risks of Low-Priced Stocks. The Common Stock is subject to the
so-called penny stock rules that impose additional sales practice requirements
on broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally defined as an investor with a net
worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000
together with a spouse). For transactions covered by this rule, the
broker-dealer must make a special suitability determination for the purchaser
and must have received the purchaser's written consent to the transaction prior
to sale. These regulations may adversely affect the ability or willingness of
broker-dealers to sell the Common Stock.
The Commission has adopted regulations that define a penny stock to be
any equity security that has a market price (as defined) of less than $5.00 per
share or an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require the delivery, prior to the transaction, of a disclosure schedule
relating to the penny stock market. The broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and, if the broker-dealer is the sole
market-maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market.
As of the date hereof, the Common Stock qualifies as a penny stock and
is subject to the above regulations. The above regulations could adversely
affect the market liquidity for the Common Stock and could limit the ability or
willingness of broker-dealers to sell the Common Stock as well as the ability of
holders of the Common Stock to sell the Common Stock in the secondary market.
8
<PAGE>
11. Shares Eligible for Future Sale. Of the 13,083,732 shares of Common
Stock issued and outstanding as of March 31, 2000, 11,181,132 are freely
transferable without restriction or further registration under the Act (other
than shares held by "affiliates" of the Company), and the remaining 1,902,600
are "restricted securities", as that term is defined under Rule 144 promulgated
under the Act, and under certain circumstances may be sold without registration
pursuant to that Rule. Of the 595,027 shares of Preferred Stock issued and
outstanding on March 31, 2000, all are freely transferable without restriction
or further registration under the Act (other than shares held by "affiliates" of
the Company). As of March 31, 2000, there were 67,300 shares of Common Stock
issuable by the Company to the holders of the outstanding unexercised 1995
Warrants, 86,800 shares of Common Stock issuable by the Company to the holders
of the outstanding unexercised 1996 Warrants, 4,000 shares of Common Stock
issuable by the Company to the holders of the outstanding 1996-B Warrants, 1,500
shares of Common Stock issuable to the holders of the outstanding 1997 Warrants,
4,000 shares of Common Stock issuable to the holders of the outstanding 1998-A
Warrants, 1,003,007 shares of Common Stock issuable to the holders of the
Management Options, 100,000 shares of Common Stock issuable upon the exercise of
the GEM Warrants, 5,000 shares of Common Stock issuable by the Company to the
holders of the outstanding 1998-B Warrants, 15,000 shares of Common Stock
issuable to the holders of the 1999-A Warrants, 1,657,200 shares issuable upon
conversion of the Senior Notes, 125,400 shares issuable upon exercise of the
Consultant Warrants, and 3,452,250 shares issuable upon exercise of the 1999-B
Warrants. Such Common Stock, if issued, will be freely tradeable under the Act.
See "Description of Securities". We are unable to predict the effect that sales
made under Rule 144 or otherwise may have on the market price of the Common
Stock prevailing at the time of any such sales. See "Description of
Securities--Shares Eligible for Future Sale" and "Market for Securities".
9
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12. Year 2000 Compliance. In prior years, we discussed the nature and
progress of our plans to become Year 2000 ready. In late 1999, we completed our
remediation and testing of systems. As a result of those planning and
implementation efforts, we experienced no significant disruptions in mission
critical information technology and non-information technology systems and
believe those systems successfully responded to the Year 2000 date change. We
expensed approximately $25,000 during 1999 in connection with remediating our
systems. We are not aware of any material problems resulting from Year 2000
issues, either with our products, our internal systems, or the products and
services of third parties. We will continue to monitor our mission critical
computer applications and those of our suppliers and vendors throughout the Year
2000 to ensure that any latent Year 2000 matters that may arise are addressed
promptly.
10
<PAGE>
13. Ability to Service Debt; Subordination. As a result of our
incurrence of indebtedness in connection with our issuance of the Senior Notes,
we will be obligated to make substantial principal and interest payments to the
holders of the Senior Notes.
During October 1999, in an effort to reduce our debt payments, we
authorized the voluntary conversion of all or any part of the Senior Notes into
shares of Common Stock at the rate of $2.50 per share, at any time until the
maturity date of December 31, 2001. If all of the $4,618,000 principal amount of
the Senior Notes are converted, we would issue 1,847,200 shares of Common Stock.
We have agreed to use our best efforts to register for resale under the Act the
shares of Common Stock into which the Senior Notes are convertible. Through
March 31, 2000, a total of $525,000 of our Senior Notes have been converted into
210,000 shares of Common Stock.
In the event that no additional Senior Notes are converted, on December
31, 2001, we are obligated to repay the $4,093,000 remaining principal amount of
the Senior Notes. Until the Senior Notes have been paid by us, the amount of the
Senior Notes will be reflected as a liability on our financial statements, net
of related discount. In addition, pending such repayment, our Company is
required to make interest payments each calendar quarter in the amount of
$122,790, or in the amount of $491,160 each year. The ability of our Company to
satisfy its debt obligations will be dependent on its future performance and the
success of its product lines and on its ability to raise capital. Such
performance is subject to financial, business and market factors and other
factors affecting our Company's business and operations.
We anticipate that the scheduled interest and principal payments
required under the Senior Notes can be met from cash from operations, if any, as
well as proceeds from other securities offerings. However, there can be no
assurance that such interest and principal payments can be met.
The Senior Notes are unsecured and thus, in effect, will rank junior to
any Senior Indebtedness, as defined therein. See "Description of Securities -
12% Senior Notes." The payment of any amount owing in respect of the Senior
Notes will be subordinated to prior payment in full of all existing and future
Senior Indebtedness. In the event of the liquidation, dissolution,
reorganization or similar proceedings with respect to the Company, assets of the
Company will be available to pay obligations on the Senior Notes only after all
of the Senior Indebtedness, as applicable, has been paid in full, and there can
be no assurance that sufficient assets to pay amounts due on all or any of the
Senior Notes will remain.
11
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USE OF PROCEEDS
The Company will not directly receive any of the proceeds from the
sales of the Common Stock by the Selling Shareholders. See "Selling
Shareholders" for a list of those Shareholders entitled to receive net proceeds
from the sales of the Common Stock. The Selling Shareholders will receive all of
the net proceeds from the sale of the Common Stock pursuant to this Prospectus.
See "Description of Securities."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
This Form SB-2 contains certain forward looking statements regarding,
among other things, the anticipated financial and operating results of the
Company. For this purpose, forward looking statements are any statements
contained herein that are not statements of historical fact and include, but are
not limited to, those preceded by or that include the words, "believes,"
"expects," "anticipates," or similar expressions. Those statements are subject
to known and unknown risks, uncertainties and other factors that could cause the
actual results to differ materially from those contemplated by the statements.
The forward looking information is based on various factors and was derived
using numerous assumptions. Important factors that could cause the Company's
actual results to differ materially from those projected, include, for example
(i) the ability of the Company to generate sufficient sales to generate
operating profits, or to sell products at a profit, (ii) the ability of the
Company to raise funds in the future through sales of securities, (iii) whether
the Company is able to enter into binding agreements with third parties to
assist in product or network development, (iv) the ability of the Company to
commercialize its developmental products, or if actually commercialized, to
obtain commercial acceptance thereof, (v) the ability of the Company to compete
with its competitors to obtain market share, (vi) the ability of the Company to
obtain sufficient funds through operations or otherwise to repay its debt
obligations, (vii) the ability to prevail in its pending legal proceeding with
MBE, or (viii) the failure by the Selling Shareholders to deliver to the Company
the amount of $2,200,000 due on or before August 31, 2000 pursuant to
subscription agreements entered into during June 2000 covering the sale of
2,200,000 shares of Common Stock. Although the Company believes that the forward
looking statements contained herein are reasonable, it can give no assurance
that the Company's expectations will be met.
Introduction
Events in the latter portion of the fiscal year ended June 30, 1998
enabled the Company to complete its transition from a development stage
enterprise to an enterprise focusing on marketing its products and its
commercial operations. The Company has incurred operating losses during the
years ended June 30, 1999 and 1998 of $3,651,624 and $3,568,281, respectively,
and lost $5,997,689 for the nine months ended March 31, 2000, and anticipates
incurring operating losses through at least the first half of fiscal 2001.
The Company's independent auditors have included an explanatory
paragraph in their report on the Company's June 30, 1999 consolidated financial
statements discussing issues which raise substantial doubt about the Company's
ability to continue as a going concern. The Company believes that the funds
available at March 31, 2000 combined with the revenues to be generated from
operations, the potential capital to be raised from the exercise of Common Stock
Purchase Warrants, private placement offerings, and the ability to reduce
anticipated expenditures, if required, will provide for the Company to continue
as a going concern.
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Results of Operations
Fiscal quarter and nine months ended March 31, 2000:
The fiscal quarter ended March 31, 2000 resulted in a net operating
loss of $2,175,039 compared to a net loss of $758,643 for the fiscal quarter
ended March 31, 1999, for the reasons described below. Losses are projected to
continue until sufficient revenue is generated from equipment sales and
licensing fees from the Company's proprietary technology.
Revenues were $314,256 compared to $997,436 from the previous year's
fiscal quarter. This $683,180 or 69% shortfall reflects the large Prime
Hospitality rollout of the MBE Business Express(TM) last year at this time. Of
the total revenues, equipment sales totaled $159,011, a decrease of $705,332 or
82% over the same period last year. License fees, however, increased to $155,245
from $133,093 for the same period during the prior year, an increase of 17%.
This is due to the continuing increase in the installed base of control systems.
Revenue is still well below the level required for the Company to be profitable.
Cost of sales for the period included labor and equipment of $159,310
which represented a decrease of $525,526 or 77% versus the same period during
the prior year, and is directly attributable to the decrease in equipment sales
described above.
General and administrative expenses of $1,392,857 increased by $776,788
or 126% from the same quarter last year. The principal reason was a large
increase in legal costs of $355,095 or 117%. Of this increase, $280,272 was for
legal fees related to the MBE litigation described in Part II, Item 1 (Legal
Proceedings), which has been funded through the issuance of Company stock and
therefore does not consume cash. Other components of general and administrative
costs included an increase in outside services of $147,273 or 351%; consulting
fees increase of $72,050, advertising cost increase of $42,105, professional
fees increase of $40,139, repairs and maintenance expense increase of $34,942,
travel expense increases of $26,641, and increases in telephone expenses of
$19,976 or 72%.
Compensation expense of $513,382 increased by 52% due to increased
personnel activities in all areas of the Company. The interest expense of
$402,894 increased by $382,541, which was due to two factors. The increase in
non-cash amortization of the debt issuance cost and the equity component was
$258,401; while the remaining increase was primarily due to interest payments on
the remaining 12% Senior Debt. Depreciation expense decreased from $31,710 to
$20,150, primarily due to the transfer of $8,984 of depreciation expense to cost
of goods as offset to licensing revenues generated from installations owned by
the Company.
During the quarter, shares of common stock have been issued in lieu
of cash payments with a fair value of $351,899, and are reflected primarily as
an increase in prepaid assets.
The nine month period ended March 31, 2000 resulted in a net operating
loss of $5,997,689 compared to a net loss of $2,138,780 for the comparable
period ended March 31, 1999. Revenues were $1,407,760 compared to $3,340,282, a
$1,932,522 or 58% reduction. Of the total revenues, equipment sales totaled
$931,797, a decrease of $2,089,930 or 69%. Cost of sales of $864,402 represented
a decrease of $1,711,992, and is directly attributable to the decrease in
equipment sales. General and administrative expenses of $3,555,753 increased by
$1,941,346 or 120%. The principal reason was a large increase in legal fees of
$1,112,438 related to the MBE litigation described in Part II, Item 1, (Legal
Proceedings). Other components of general and administrative costs included
increases in outside marketing and operational services of $370,399, increased
charges for consulting and professional fees of $195,535, and increases in costs
related to the rental and maintenance of the company's corporate office of
$88,087 or 153%; offset by reductions in travel and entertainment and trade show
costs of $45,504. Compensation expense of $1,664,299 increased by $639,145 or
62% due to increased personnel activities in all areas of the Company. Debt
related expenses including interest charges increased $1,217,072 over the
comparable nine month period last year, due to interest charges on the Senior
Notes outstanding for this current period and amortization of debt issuance
costs and the equity component of the Senior Notes.
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Fiscal year ended June 30, 1999:
For the fiscal year ended June 30, 1999, the Company had a net loss of
$3,651,624. The overall loss applicable to common shares of $4,654,077 or $1.07
per common share (basic and diluted) was derived by adding the $3,651,624 net
loss and the $1,002,453 of cumulative preferred and other adjustments and
dividing by the weighted average shares outstanding of 4,348,866.
Revenues for the fiscal year ended June 30, 1999 were $3,890,516, an
increase of $2,065,287 or 113% over the prior year, reflecting the continued
penetration of the Business Express(R) and the MBE Business Express(TM) into the
marketplace.
Operating expenses for the fiscal year ended June 30, 1999 were
$7,295,628, representing a $1,793,978 or 33% increase over the prior year. The
primary contributors to this increase were cost of equipment sales and general
and administrative expenses, as detailed below.
Cost of sales increased by $1,701,193 from the prior year, primarily
reflecting the increase in MBE Business Express(TM) business. General and
administrative expenses of $2,687,744 increased by $473,760 or 21%. This
increase is primarily due to legal expenses associated with the pending MBE
litigation, which amounted to over $600,000. See "Business - Legal Proceedings."
Without these legal expenses, general and administrative expenses would have
declined by over $100,000. In addition, outside services increased by $141,135
or 199% primarily to fund promotional programs in the marketing and investor
relations areas. Offsetting these increases were decreases in travel and
entertainment expenses of $147,097, or 42%; decreases in product development of
$45,760 or 46%; and decreases in advertising by $103,270 or 49%.
Compensation expense was $1,553,189, a decrease of $356,493 or 19% from
the previous year. The decrease was primarily due to the non-cash expense of
$554,630 last year which reflected the compensation charge recorded for the
repricing of the Common Stock options below fair market value during April 1998.
Offsetting this decrease were increases in salaries of $237,260, or 21%, which
is due to increased personnel requirements in the operations and sales areas.
Depreciation expense of $91,773 decreased by $24,382 or 21%, due to a
lower depreciable asset base.
Fiscal year ended June 30, 1998:
For the fiscal year ended June 30, 1998, the Company had a net loss of
$3,568,281. The overall loss applicable to common shares of $5,322,847 or $1.51
per common share (basic and diluted) was derived by adding the $3,568,281 net
loss and the $1,754,566 of cumulative preferred and other adjustments and
dividing by the weighted average shares outstanding of 3,532,048.
Revenues for the fiscal year ended June 30, 1998 were $1,825,229, an
increase of $1,217,457 or 200% over the prior year, reflecting the continued
entrance of the Business Express(R) and the MBE Business Express(TM) into the
marketplace.
Operating expenses for the fiscal year ended June 30, 1998 were
$5,501,650, representing a $1,758,689 or 47% increase over the prior year. The
primary contributors to this increase were cost of sales, general and
administrative expense, and compensation expense, as detailed below.
Cost of sales increased by $736,639 from the prior year, primarily
reflecting the increase in MBE Business Express(TM) business. General and
administrative expense of $2,213,984 increased by $173,821 or 8.5% which
reflects both a general increase in spending to support the expansion of
operations and other factors as described below. Specifically, the major
contributors to this increase were: reserves of $87,520 established in fiscal
1998 to cover estimated future field service warranty expenses for the Company's
control system terminals; marketing promotions and trade show expenses
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increased $64,901 or 59%; and advertising increased by $125,204 or 143%,
reflecting the need to increase product awareness in the marketplace. Certain
other increases were experienced in outside services, telephone, and office
supplies. Certain other expenses decreased as compared to the prior year,
primarily professional and consultant fees, which decreased by $109,916 or 20%.
Compensation expense was $1,909,682, an increase of $829,224 or 76.7%
over the previous year. The increase was primarily due to the non-cash expense
of $554,630 which reflects the compensation charge recorded for the repricing of
the common stock options below fair market value during April 1998. The
remainder of the increase is due to increased personnel requirements in the
operations and sales areas.
Depreciation expense of $116,255 increased by $19,005, which is
attributable to the increased depreciable asset base.
Plan of Operations
As of March 31, 2000, the Company had an installed base of a total of
1,321 control systems, distributed as follows: 1,122 Business Express(R) or MBE
Business Express(TM) control systems, 75 Business Express(R) Limited Service
control systems, 36 Copy Express(TM) control systems, 27 Debit Express(TM)
control systems, 11 Fax/Printer Express(TM) control systems, 42 Public PC(R) and
8 TransAct(TM) control systems located at various hotels and libraries
throughout the United States and Canada. The total Business Express(R) or MBE
Business Express(TM) locations as of March 31, 2000 was 352, compared to 290
locations as of March 31, 1999. The total license fee revenues received by the
Company from these systems increased by 17% from the same quarter last fiscal
year, but is still well below the level required to achieve profitability.
The Company has developed a product line extension to its flagship
Business Express(R) product, called the Business Express(R) Limited Service
Series (LSS). The LSS has copier and fax capabilities plus laptop printing,
dataport capabilities and credit card activated phone. The LSS is targeted to
the hospitality industry, which includes mid-market, limited service and economy
properties. As of March 31, 2000, 43 LSS locations have been installed, in
Holiday Inns, Best Westerns and others.
In March 2000, the Company signed an agreement with an affiliate of
MeriStar Hospitality Corporation, which is the largest independent hotel
management company in the United States, operating approximately 225 hotels and
resorts under such names as Hilton, Holiday Inn and Wyndham. The agreement
provides that the Company will be the exclusive provider of business center
solutions to the approximately half of the hotels and resorts which are owned by
MeriStar, and will be recommended as the preferred provider of business center
solutions to the other half which are managed but not owned by MeriStar. The
agreement expires in February 2002. As of March 31, 2000, two business center
solutions have been installed at MeriStar locations.
In April, 2000, the Company signed an agreement with Wayport, Inc. of
Austin Texas, a leading high speed Internet solutions provider. The agreement
allows the Company to broaden its business center offering to provide its hotel
customers with in-room Internet access; provides faster response times for its
current Business Express(R) product; and gives the Company a strategic partner
to co-market the Business Express(R).
The Company's next generation of terminal, e-Port(TM), would contain
the functionality of the current TransAct(TM) terminal for card processing,
control and data management, and in addition would offer capability for public
access electronic commerce and advertising using the internet. The Company
introduced to the public a preliminary version of e-Port(TM) in mid December. A
limited number of e-Port(TM) units have been manufactured, and during the next
several months, the Company anticipates that it would beta-test these terminals
in selected locations, and believes that it would begin selling e-Port(TM) in
the next fiscal year.
On May 2, 2000, the Company was issued a United States patent for a
system to control and network vending machines. The Company believes that the
patent may place it in a solid position to help the $35 billion vending industry
in its on-going efforts to network its vending machines together for better
control and increases in operating efficiency. The Company also received a
notice of allowance for a related patent for a system for batch processing of
credit card transactions, and believes that this patent may facilitate a unique
ability to affordably process the micro transactions which are typical of
vending machine operations. The Company is working with a Fortune 100 consumer
products company, pursuant to which that company would establish a pilot program
using e-Port(TM) in a limited number of its beverage vending machines. The pilot
is expected to begin in the spring and last several months, with all costs
covered. The Company is in discussions with that consumer products company
regarding a comprehensive business relationship if the pilot program is a
success. The patent in conjunction with e-Port(TM) would allow a networked,
credit card operated system which could manage inventory on a real time basis,
and give consumers an internet experience.
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In total, the Company has eight issued patents, and thirty-four
patents pending. These patents generally cover credit card processing and the
system and network in which it functions, which includes office equipment,
vending machines and retail points of sale. The most recent patents pending
cover the use of the e-Port(TM) including interactive advertising and
e-commerce, in a variety of end user applications.
The Company continues to work with its business partner IBM in
designing an enhanced internet-capable version of the network which will
underlie all transaction processing for e-Port(TM), including advertising and
e-commerce.
The Company is marketing its products through its full-time sales staff
consisting of three national accounts salespeople and two regional sales
managers, either directly to customer locations or to management companies or
distributors servicing these locations. Strategic partnerships and pilot
programs with key customers continue to be pursued and developed.
In May, 2000, the Company demonstrated its vision for use of the
e-Port(TM) at the @d:tech.San Francisco Internet conference. The Company
announced its intention to position itself as a key player in the interactive
media space, with e-Port(TM) targeted at three Internet markets: interactive
advertising, electronic commerce and pervasive computing. As a non-PC device,
e-Port(TM) allows Internet access in many locations currently unreachable by the
PC, such as retail point of sale and vending.
Liquidity and Capital Resources
For the nine month period ended March 31, 2000, there was a net
increase in cash of $1,720,414. This was attributable primarily to net proceeds
of $6,422,691 from the issuance of Common Stock and the exercise of warrants.
Cash was used by the operating loss of $5,997,689, partially offset by favorable
changes of $282,458 in operating assets and liabilities including the effect of
using stock in lieu of cash payments, and $752,339 of non cash amortization of
the equity component of the Senior Note. As of March 31, 2000, total cash on
hand was $3,385,430, and working capital was $4,070,400, of which $1,117,375 was
invested in inventory.
During the quarter ended September 30, 1999, 136,000 1999-A Warrants
were exercised at $.50 per share, resulting in gross proceeds to the Company of
$68,000.
During October and November 1999, the Company's Board of Directors
authorized a private placement offering to accredited investors of up to 356
units at a unit price of $10,000. Each unit consisted of 10,000 shares of Common
Stock at $1.00 per share, and 10,000 1999-B Warrants. Each 1999-B Common Stock
purchase warrant entitles the holder to purchase one share of Common Stock for
$2.00. As a result of the offering, during October, November and December 1999,
a total of 356 units were sold at $10,000 per unit, resulting in gross proceeds
of $3,560,000 to the Company.
During the period October 1, 1999 through December 31, 1999, an
additional 627,700 1999-A Warrants were exercised at $.50 per warrant, resulting
in gross proceeds to the Company of $313,850.
During December 1999, the holder of 10,000 of the GEM Warrants which
had been issued in June 1997 exercised such warrants for $2.00 per share
resulting in $20,000 of gross proceeds.
During January 2000, the Company issued an aggregate of 146,900 shares
of Common Stock upon the exercise of 1999-A Warrants at $.50 per share
generating gross proceeds of $73,450.
During February 2000, the Company received gross proceeds of $85,000
upon the exercise of warrants by Harmonic Research, Inc. to purchase 34,000
shares of Common Stock at $2.50 per share.
During February and March 2000 the Company issued an aggregate of
107,750 shares of Common Stock upon the exercise of 1999-B Warrants at $2.00 per
share for gross proceeds of $215,500.
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During February 2000, the Company received gross proceeds of $31,250
upon the exercise of options by the holders thereof for 16,500 shares of Common
Stock.
During February, March and April 2000, the Company sold an aggregate of
1,300,000 shares of Common Stock pursuant to a private placement at $2.00 per
share generating gross proceeds of $2,600,000.
During June 2000, the Company sold to the Selling Shareholders an
aggregate of 2,200,000 shares of Common Stock pursuant to a private placement at
$1.50 per share. In July 2000, the purchase price was reduced to $1.00 per
share. Pursuant to the subscription agreements entered into by the Selling
Shareholders and the Company, the purchase price of $2,200,000 is to be paid on
or before August 31, 2000. As of the date hereof, the Company has not received
any payments against the outstanding subscriptions.
The Company believes that existing proceeds from the above, together
with funds available from the potential exercise of outstanding warrants and
options, payment of the $2,200,000 by the Selling Shareholders, increased
revenues from its business, and additional sales of securities would be
sufficient to fund operations until at least through December 31, 2000. However,
there can be no assurance that any such additional warrant or option exercises
would occur, any additional securities would be sold, that the monies due under
the subscription agreements would be paid, or that increased revenues would
result from its business activities. Under such circumstances, the Company may
cease to be a going concern or may have to reduce its operations.
During the fiscal year ended June 30, 1999, the Company completed
several financing transactions. Net proceeds of $4,106,440 were realized from
issuance of Senior Notes, $254,360 were realized from private placement
offerings of Series A Preferred Stock, and $182,540 were realized from Common
Stock transactions, principally the exercise of Common Stock Purchase Warrants
and Options. As of June 30, 1999, the Company had working capital of $1,279,367,
which included cash and cash equivalents of $1,665,016 and inventory of
$1,255,836.
During the fiscal year ended June 30, 1999, net cash of $3,940,414 was
used by operating activities, primarily due to the net loss of $3,651,624. The
net cash provided by financing activities of $5,320,747 was principally due to
the net proceeds generated from the issuance of the Senior Notes and the
$804,485 proceeds from the line of credit from IBM Global Financing.
The Company's independent auditors have included an explanatory
paragraph in their report on the Company's June 30, 1999 consolidated financial
statements discussing issues which raise substantial doubt about the Company's
ability to continue as a going concern. The Company anticipates that for the
year ending June 30, 2000 there will be a negative cash flow from operations in
excess of $4.0 million. However, the Company believes that the funds available
at December 31, 1999 combined with the revenues to be generated during fiscal
year 2000, the potential capital to be raised from the exercise of the Common
Stock Purchase Warrants and private placement offerings, and the ability to
reduce anticipated expenditures, if required, will provide for the Company to
continue as a going concern through calendar year 2000.
Commitments
The Company leases approximately 10,000 square feet in Wayne,
Pennsylvania for a monthly rental of $11,500 plus utilities and operating
expenses. The lease is for a term of three years and expires June 30, 2002.
The Company has acquired inventory financing using IBM Global
Financing. The debt to IBM is secured primarily by the inventory being financed.
As of March 31, 2000, $83,689 of inventory is being financed. Such
inventory was originally the inventory of the MBE Joint Venture, but was
purchased by the Company from the MBE Joint Venture when the MBE Joint Venture
was terminated in May 1999.
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BUSINESS
USA Technologies, Inc., a Pennsylvania corporation (the "Company"), was
founded in January 1992. The Company is a leading provider and licensor of
automated, credit card activated control systems for the copying, debit card and
personal computer industries. The Company's devices make available credit card
payment technology in connection with the sale of a variety of products and
services. The Company generates its revenues from the direct sale of its control
systems and the resale of configured office products, from monthly
administrative fees paid by locations utilizing its control systems, and from
retaining a portion of the monies generated from all credit card transactions
conducted through its control systems.
The Company has developed an automated, credit card activated control
system to be utilized with photocopying machines, facsimile machines, computer
printers, and debit card purchase/revalue stations. The control systems allow
consumers to use credit cards to pay for use of these products.
The Company has also developed the Public PC(R), which is an automated
credit card activated control system to be used in connection with a personal
computer, including on-line services, such as the Internet. This product enables
locations to offer the use of personal computers to the public on an "as needed"
basis utilizing credit cards as a method of payment. In addition, the Company
introduced to the university library market its Automated Print Payment
System(TM) (APPS). This system enables libraries to charge users via
credit/debit cards for the printed output from computer networks, thus providing
a new source of revenue to cover their increasing costs of operations.
During fiscal year 1997, the Company introduced the Business
Express(R), which is being marketed to the hospitality industry as an amenity to
the business traveler. The Business Express(R) combines the Company's existing
applications for computers, copiers, and facsimiles into a kiosk type
configuration. All services provided are credit card activated. The Business
Express(R) continues the Company's move towards the sale of the Company's
proprietary equipment to operators rather than the revenue sharing arrangements
employed in past years. The Company still retains all rights to software and
proprietary technology which it licenses to location operators for their
exclusive use. As of March 31, 2000, 352 Business Express(R) or MBE Business
Express(TM) units have been installed.
During the last part of the 1999 fiscal year, the Company introduced
a product line extension to its flagship Business Express(R) product, called the
Business Express(R) Limited Service Series (LSS). The LSS has copier and fax
capabilities plus laptop printing, dataport capabilities and credit card
activated phone. The LSS is targeted to the hospitality industry, which includes
mid-market, limited service and economy properties. As of March 31, 2000, 43
LSS units have been installed.
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The Company generates its revenues from the sale of equipment utilizing
its control systems, from retaining a portion of the revenues generated from all
credit card transactions conducted through its control systems, and from monthly
administrative fees from each location utilizing its control systems. The
Company has entered into a joint marketing agreement with Minolta Corporation,
and has been designated as an authorized equipment reseller by Hewlett-Packard
Company and International Business Machines Corporation. The Company believes
that it benefits from the association of its control systems with the well-known
brands of business equipment manufactured by these companies.
On September 24, 1997, the Company entered into a Joint Venture
Agreement with Mail Boxes Etc. ("MBE"), in order to sell and market automated,
credit card activated business centers under the name MBE Business Express(TM)
to the hospitality industry. The MBE Business Express(TM) bundles together the
same components as the Business Express(R), but under the MBE brand name. In
addition, the MBE Business Express(TM) includes a dial-through service to a
nearby MBE store making available the products and services of the store.
Through the fiscal year ended June 30, 1999, the MBE Joint Venture sold and
installed 203 MBE Business Express(TM) business centers. The MBE Joint Venture
was terminated in May 1999 and the Company is currently involved in legal
proceedings with MBE. Notwithstanding these proceedings, the Company continues
to service all field installations. See "Business - Legal Proceedings."
In 1998, Prime Hospitality Corp. entered into an agreement with the MBE
Joint Venture, pursuant to which Prime would purchase a minimum of 100 MBE
Business Express(TM) units for installation at Prime's owned and managed hotels
(primarily the AmeriSuites brand). During the first quarter of fiscal year 2000,
all of the installations under the agreement had been completed, generating
total revenues of approximately $1.9 million.
During the past fiscal year the Company has focused on developing a new
terminal, trademarked e-Port(TM). It contains all the functionality of the
current TransAct(TM) terminal for credit card processing, control and data
management, and in addition would offer capability for public access electronic
commerce and advertising using the Internet. With the development of e-Port(TM),
USA Technologies hopes to position itself to claim a piece of two important
market spaces within the new "Internet" economy - electronic commerce and
pervasive computing. To date, there are no commercial installations of the
e-Port(TM).
In May 1999, the Company signed an agreement with International
Business Machines Corporation ("IBM") whereby IBM agreed to be the executional
partner for certain aspects of the Company's business, including project
management services, asset procurement, configuration and testing of equipment,
site preparation, installation, maintenance services, and asset management. This
agreement expands an earlier agreement between IBM and the MBE Joint Venture
from 1,000 to 5,000 locations, and expands the array of products which are
eligible for IBM installation. IBM is also helping the Company design an
enhanced version of the network which will underlie all transaction processing
for e-Port(TM), including advertising and e-commerce.
The Company has entered into a corporate agreement on May 14, 1999 with
Choice Hotels International (which includes the Comfort, Clarion, Quality,
Sleep, Econo Lodge, Rodeway and Mainstay brands) which establishes USA as the
only endorsed vendor of business center products for its over 3,000 properties.
This agreement reflects Choice's commitment to promote the Company's LSS
internally to its own hotels. Also, the Company has entered into a corporate
agreement with Promus Hotel Corporation (Embassy Suites, Hampton, and Doubletree
brands) which establishes itself as a preferred supplier of business center
products for those brands. In addition, the Company's Business Express(R) has
been approved and recommended as a solution for business center needs by
Marriott for its hotels.
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In March 2000, the Company and MeriStar H&R Operating Company, L.P., an
affiliate of MeriStar Hospitality Corporation ("MeriStar"), entered into a
Business Center Solutions Supply Agreement. MeriStar is the largest independent
hotel management company in the United States, operating 225 hotels and resorts
under such known brand names as Hilton, Holiday Inn and Wyndham. The agreement
provides that the Company will supply its business center products to MeriStar
managed and MeriStar owned hotels. The Company's business center products are
the Business Express(R), Business Express(R) Limited Service Series, and
TransAct(TM) terminals. The Company will be listed as the only business center
provider in all purchasing guidebooks and purchasing web sites of MeriStar. The
Company will be the exclusive provider of business center solutions to the 116
properties owned by MeriStar. MeriStar will recommend the Company as the
preferred provider of business center products for the remaining 109 hotels
which are managed but not owned by MeriStar. The agreement expires in February
2002, and may be terminated by either party prior thereto upon 60-days prior
notice.
In April 2000, the Company signed an agreement with Wayport, Inc. of
Austin, Texas, a leading high speed Internet solutions provider. Wayport
provides high speed Internet access to hotels, airports and conference centers
at speeds 50 times faster than regular modem connections. The agreement benefits
the Company in three ways: broadening its business center product offering to
include providing hotels with in-room high speed Internet access; providing
faster speed in the Business Express(R) product itself; and giving the Company a
strategic partner to co-market its Business Express(R) product.
On June 24, 2000 the Company entered into a Development and
Manufacturing Agreement ("DMA") with RadiSys Corporation, a leading global
designer and manufacturer of building blocks enabling next generation Internet
and communications systems. Pursuant thereto, RadiSys will develop a rengineered
version of the e-Port for the Company. RadiSys will then exclusively manufacture
the revised e-Port product for the Company. The Company's e-Port is a web
enabled credit card device which allows customers to conduct e-commerce
transactions while making everyday purchases at vending machines, convenience
stores, gas pumps, business centers and other high traffic retail points of
sale. The DMA can be terminated by either party upon thirty days notice.
On June 28, 2000 the Company and Xerox Corporation entered into a
Strategic Alliance Teaming Agreement pursuant to which Xerox would act as a
non-exclusive reseller and distribution entity for the Company's TransAct(TM)
terminals in the United States. Under the Agreement, Xerox would be able to
specify TransAct(TM) as another value added facet of its managed business center
solution, and in addition, would be able to sell TransAct(TM) units through its
manufacturer representative sales team and through its dealer network. The
Company's TransAct(TM) terminal is a device which permits unattended credit card
activation of various types of office equipment components. The agreement is a
non-exclusive arrangement for both parties and is terminable by either party
upon sixty days prior notice.
For the years ended June 30, 1999 and 1998, the Company has spent
approximately $198,000 and $199,000, respectively for the development of its
proprietary technology. These amounts include the expense of outside consultants
and contractors as well as compensation paid to certain of the Company's
employees and are reflected in compensation expense in the accompanying
consolidated financial statements.
As of March 31, 2000, the Company had 1,122 Business Express(R) or MBE
Business Express(TM) control systems, 75 Business Express(R) Limited Service
Series (LSS) control systems, 36 Copy Express(TM) control systems, 27 Debit
Express(TM) control systems, 11 Fax/Printer Express(TM) control systems, 42
Public PC(R) control systems and 8 TransAct(TM) control systems located at
various hotels and libraries throughout the United States and Canada. Through
March 31, 2000 the total gross revenues received by the Company from these
systems, although growing, has not been sufficient to cover operating expenses.
The Company has been certified by PNC Merchant Services (a subsidiary
of First Data Corporation), a leading credit card processor in the United
States. PNC Merchant Services has extended to the Company a fixed rate
percentage processing charge in connection with the credit card transactions
conducted through the Company's control systems. This charge is payable by the
Company (not the locations) out of its share of the gross proceeds.
Industry Trends
With trends over the last twenty years indicating an ever increasing
customer reliance on the use of credit cards as a method of payment, the Company
believes the future of purchasing retail products and services is in credit
cards rather than cash. Consumers are constantly searching for ways to purchase
quality products and services in the most convenient manner. Examples of this
trend include the increasing use of unattended Automated Teller Machines (ATM's)
in banking transactions and the use of unattended, self-service gasoline pumps
with credit and debit card payment capabilities. Consumers are becoming more
accustomed to using credit cards in an ever increasing number of retail and
service settings. They increasingly use mail order, telephone and the Internet
to order goods and services and use credit cards to pay for them. There are over
a billion credit cards in the United States. The Company's products reflect this
overall trend and feature automated credit card control systems. The Company has
focused its efforts towards the personal computer, copier, and debit card
industries.
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Further, trends in the space of electronic commerce and pervasive
computing are encouraging signs for e-Port(TM):
>> By the year 2003, 500 million internet users will be conducting $1.3
trillion in commerce over the net (versus 160 million users conducting $50
billion in 1998). This increased use would amount to two new users per
second.
>> By the year 2001, consumer used pervasive computing devices/network
appliances will outship desktop PC shipments to homes - nearly 20 million
per year by 2001.
Credit Card Processing
Each of the Company's credit card activated control devices records and
transmits all transaction data to the Company, and the Company then forwards
such data to the credit card processor. After receiving transaction information
from the Company, the credit card processor electronically transfers the funds
(less the credit card processor's charge) to the Company. The Company then
forwards to the location its share of the funds.
The Company and each location have agreed on a percentage split of the
gross proceeds from the Company's device. The credit card processor's fees and
cost to forward the location's share of the gross proceeds are all paid for out
of the Company's portion of the gross revenue.
The Company currently retains a portion of the gross revenues from each
device. If the Company has sold the equipment to the location, the portion
retained is generally 5% of the gross revenues. In cases where the Company
continues to own the equipment, the portion retained can be as high as 90% of
gross revenues. In addition, the Company charges a fixed monthly management fee
which is generally $20-$25 per control device.
Product Lines
The Business Express(R)
The hotel/motel hospitality industry continues to expand, but has
become more competitive as chains increase their efforts to attract the most
dominant and profitable customer: the business traveler. Business travelers and
conference attendees account for the majority of hotel occupancy, stay longer
and spend more per visit than the leisure traveler. For these reasons, hotels
have become very sensitive and responsive to the needs and preferences of the
business traveler. The Business Express(R) enables a hotel to address these
needs in a comprehensive and cost effective manner, while simultaneously
generating incremental revenue.
The Business Express(R) utilizes the Company's existing applications
for computers, copiers, and facsimile equipment, and combines them into a
branded product. The Business Express(R) bundles the Public PC(R) unit, the Copy
Express(TM) unit, and the Fax Express(TM) unit, into a functional kiosk type
work station. All devices are credit card activated, therefore eliminating the
need for an attendant normally required to provide such services.
The MBE Business Express(TM)
The MBE Business Express(TM) bundles together the same components as
the Business Express(R): Public PC(R), Copy Express(TM), and Fax Express(TM),
but under the MBE brand name. In addition, the MBE Business Express(TM) includes
a dial-through service to a nearby MBE store making available the products and
services of the store.
The MBE Business Express(TM) was marketed and sold by the MBE Joint
Venture which was terminated in May 1999. The Company is presently engaged in
legal proceedings with MBE. See "Business - Legal Proceedings."
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The Copy Express(TM)
Traditionally, customers wishing to use a photocopying machine have
either used a prepaid, stored value card or cash. In most instances, this places
a burden on employees of the facility to provide a number of services unrelated
to their primary jobs, such as providing change and
collecting/counting/reloading coins. With the Copy Express(TM), the attendant no
longer needs to interact with the customers for these purposes.
The Copy Express(TM) provides a cashless method to pay for the use of
photocopying machines. The device is attached to the photocopying machine,
computer printer, or microfilm/fiche printer in a similar manner as attaching a
standard coin acceptor. The device can be attached to either existing or new
equipment. The control system enables customers to photocopy documents with the
use of a credit card.
The Debit Express(TM)
Many "closed" environments such as universities or hospitals utilize a
private card known as a debit or "stored value" card, to store cash value. The
system works by encouraging customers (by discounting the price of the products
or services) to transfer lump sum cash values onto a magnetic stripe or imbedded
chip card that can be used to activate equipment within the closed environment.
As the cardholder uses the card to purchase products or services the cash value
is deducted from the total value on the card. Typically, the cards are purchased
from attendants or from machines which accept coins or dollar bills.
The Company's Debit Express(TM) enables customers to purchase or
revalue their debit cards with the swipe of a credit card and eliminates the
need for cash or for an attendant to handle cash or provide change. The Debit
Express(TM) eliminates any reliance on cash by allowing customers to use a valid
credit card to purchase or place additional value on a debit card.
The Public PC(R)
The Company believes that the growing dependence on personal computers
has created an environment where there is a need for access to personal
computers by the general public on an "as needed" basis. To meet this need, the
Company has developed the Public PC(R). Through December 31, 1999, the Company
has an installed base of 41 units in libraries and retail locations. The device
enables the public to utilize personal computers and/or the services they offer
on an "as-needed" basis. The system is designed so that the computer cannot be
used until a valid credit card is swiped through the control system. Once the
user is authorized to proceed, the system has the ability to charge for time in
use, printed output, and any modem activity.
The Company believes that the personal computer is becoming an integral
part of how people access and utilize the information available to them. The
Company believes that the majority of libraries do not currently offer general
use personal computers to their patrons. The Company will pursue print shops,
cyber cafes, hotels, airports, convention and conference centers, and various
retail outlets as potential customers.
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The e-Port(TM)
e-Port(TM) contains all the functionality of the current TransAct(TM)
terminal for credit card processing, control and data management, and in
addition would offer capability for public access electronic commerce and
advertising using the Internet. With e-Port(TM), the Company believes it has
positioned itself to claim a piece of two important market spaces within the new
"Internet" economy -- electronic commerce and pervasive computing. e-Port(TM)
would enable e-commerce to be transacted away from the computer and would offer
internet merchants an extension of their business without brick and mortar
outlays. The e-Port(TM) could be considered a low cost "physical" location for
"virtual" merchants. e-Port(TM) will possibly give consumers the opportunity to
engage in interactive advertising and e-commerce while making routine purchases
at millions of points of sale - including our Business Express(R) locations,
vending machines, and convenience stores.
As of the date hereof, there are no commercial installations of the
e-Port(TM), although the Company is planning to beta test the product at its
Philadelphia offices and in other retail locations in the United States.
TransAct(TM) as a Stand Alone Product
The Company has developed TransAct(TM), a cashless transaction terminal
that enables secure, low cost credit transactions to take place. As the nerve
center for USA's Business Express(R) product line and the MBE Business
Express(TM), TransAct(TM) currently enables over 400 automated business center
locations, that benefit from TransAct's ability to provide 24/7 business center
accessibility, secure transaction settlements and voice and display instructions
for users. The installed locations of Business Express(R) indicates that
TransAct(TM) works effectively to transform a la carte office components into
automated, credit card-operated, revenue centers.
To effectively penetrate the "pay as you go" business service markets
within the retail, university, transportation and apartment communities, three
standardized TransAct(TM) packages have been developed, priced and launched to
office component dealers who already service these markets. The Company
anticipates that the development of a dealer channel to sell TransAct(TM) units
would increase the Company's licensing and usage revenue streams.
Marketing
The Company is currently marketing its products through its full-time
sales staff consisting of four salespeople, to hotel and retail locations,
either directly or through facility management companies servicing these
locations. The Company believes the agreements with Marriott, Choice Hotels
International, and Promus Hotel Corporation are an important component of the
Company's effort to market the Business Express(R) to the hospitality industry
because they provide instant brand name recognition.
Procurement
The Company's control system devices consist of a card reader, printer,
amplifier, circuit board and micro chip in a specially designed housing. The
devices are currently manufactured to the Company's design specification by an
independent contractor, LMC - Autotech Technologies, LP. As of March 31, 2000,
the Company has no outstanding orders with LMC.
The Company anticipates obtaining its complete computer systems (other
than the control system) through IBM. As of March 31, 2000, the Company has
adequate inventory, and has no outstanding orders through IBM.
Competition
There are currently other businesses offering an unattended, credit
card activated control system for use in connection with copiers, printers,
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general use personal computers, facsimile machines, Internet and e-mail access,
and debit card purchase/revalue stations as well as businesses offering business
centers in competition with the Business Express(R). In addition, the businesses
which have developed unattended, credit card activated control systems currently
in use in connection with gasoline dispensing, public telephones, prepaid
telephone cards, ticket dispensing machines, vending machines, or facsimile
machines, are capable of developing products or utilizing their existing
products in direct competition with the Company. Many of these businesses are
well established, have substantially greater resources than the Company and have
established reputations for success in the development, sale and service of high
quality products. The Company is aware of businesses which have developed an
unattended, credit card activated control system to be used in connection with
vending machines. Any such increased competition may result in reduced sales
and/or lower percentages of gross revenues being retained by the Company in
connection with its licensing arrangements, or otherwise may reduce potential
profits or result in a loss of some or all of its customer base. The Company is
also aware of several businesses which make available use of the Internet and
use of personal computers to hotel guests in their hotel rooms. Such services
might compete with the Company's Business Express(R), and the locations may not
order the Business Express(R), or if ordered, the hotel guest may not use it.
The Company is aware that credit card activated personal computer kiosks have
been developed and are in the marketplace.
Patents, Trademarks and Proprietary Information
The Company received federal registration approval of its trademarks
Business Express(R), C3X(R), Public PC (R), and has applied for federal
registration of its trademarks Copy Express(TM), e-Port(TM) and TransAct(TM).
Much of the technology developed or to be developed by the Company is
subject to trade secret protection. To reduce the risk of loss of trade secret
protection through disclosure, the Company has entered into confidentiality
agreements with its key employees. There can be no assurance that the Company
will be successful in maintaining such trade secret protection, that they will
be recognized as trade secrets by a court of law, or that others will not
capitalize on certain of the Company's technology.
As of June 30, 2000, the Company has thirty-four pending patent
applications as well as fourteen pending foreign patents. To date, eight United
States patents have been issued to the Company: U.S. Patent No. 5,619,024
entitled "Credit Card and Bank Issued Debit Card Operating System and Method for
Controlling and Monitoring Access of Computer and Copy Equipment", U.S. Patent
No. 5,637,845 entitled "Credit and Bank Issued Debit Card Operating System and
Method for Controlling a Prepaid Card Encoding/Dispensing Machine", U.S. Patent
No. D423,474 entitled "Dataport", U.S. Patent No. D415,742 entitled "Laptop Data
Port Enclosure", U.S. Patent No. D418,878 entitled "Sign Holder", U.S. Patent
No. 6,056,194 entitled "System And Method For Networking And Controlling Vending
Machines", U.S. Patent No. D428,047 entitled "Electronic Commerce Terminal
Enclosure", and U.S. Patent No. D428,444 entitled "Electronic Commerce Terminal
Enclosure For A Vending Machine"; and, to date, one foreign patent has been
granted to the Company, Canadian Patent No. D87998 entitled "Sign Holder."
Employees
As of March 31, 2000, the Company had twenty-five full time employees.
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Properties
The Company leases its principal executive offices, consisting of
approximately 10,000 square feet, at 200 Plant Avenue, Wayne, Pennsylvania for a
monthly rental of $11,500 plus utilities and operating expenses. The lease
is for a term of three years and expires June 30, 2002.
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission critical information technology and non-information technology systems
and believes those systems successfully responded to the Year 2000 date change.
The Company expensed approximately $25,000 during 1999 in connection with
remediating its systems. The Company is not aware of any material problems
resulting from Year 2000 issues, either with its products, its internal systems,
or the products and services of third parties. The Company will continue to
monitor its mission critical computer applications and those of its suppliers
and vendors throughout the Year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.
Legal Proceedings
On June 11, 1998, the Company filed a complaint in the District Court
of the Eastern District of Pennsylvania against Alphanet Hospitality Systems,
Inc. ("Alphanet Hospitality") and Alphanet Telecom, Inc. ("Alphanet Telecom")
(collectively "Alphanet"). The complaint alleged that the Defendants engaged in
patent infringement, breach of contract, misappropriation of trade secrets,
unfair competition and tortious interference with prospective business
relations. The Company and Alphanet Hospitality had considered entering into a
business relationship. In order to protect the Company's confidential
information and trade secrets, Alphanet Hospitality signed a Non-Disclosure and
Non-Use Agreement as part of the negotiation process. Alphanet terminated the
negotiations and the relationship with the Company. Shortly thereafter, Alphanet
began marketing an unattended business center similar to the Company's Business
Express(R). The Company believes that Alphanet wrongfully used the confidential
information and trade secrets it became privy to during the negotiations, to
develop its product.
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Alphanet Telecom, Inc. filed for bankruptcy in Canada during 1999 and
therefore the lawsuit against them was stayed. Tech Electro Industries announced
on August 12, 1999 that it intended to acquire Alphanet Hospitality. During
April 2000, the parties executed a settlement agreement and the lawsuit has been
dismissed.
On September 3, 1998, MBE commenced a legal action against the Company
in the Superior Court of the State of California, San Diego County. The
complaint alleges that 195 terminals purchased by MBE were defective, and seeks
a refund of the purchase price in the amount of $141,260 as well as lost profits
claimed to be several hundred thousand dollars. In addition, the complaint seeks
a declaratory judgement that MBE is not obligated to purchase the 600 terminals
ordered in April 1998. In October 1998, the Company had the case removed to the
United States District Court for the Southern District of California.
In September 1998, the Company commenced arbitration proceedings
against MBE in connection with MBE's breach of the Joint Venture Agreement. In
December 1998, the parties agreed that the arbitration proceedings would be
terminated, and the Company would proceed with all of its claims against MBE in
the pending Federal Court action described above.
Pursuant to the above Federal Court action, the Company asserted
counterclaims. These counterclaims allege that MBE breached the Joint Venture
Agreement by among other things, utilizing a competitor of the Company in
connection with MBE's in-store computer workstation project ("ICW Project"), for
which project the Company believes MBE was obligated to purchase USA's
terminals. The counterclaims also allege that MBE breached a separate agreement
pursuant to which it had agreed to purchase USA terminals for use in the ICW
Project. The counterclaims also allege that by attempting to revoke or cancel
its written purchase orders with the Company for in excess of 700 terminals, MBE
breached its obligations under these purchase orders. The counterclaim includes
claims by the Company against MBE for breach of contract, breach of fiduciary
duty, and trade libel. The counterclaims seek recovery from MBE of monetary
damages caused by MBE's actions, including lost profits, consequential damages
and/or incidental damages, and punitive damages. The total counterclaims are for
an amount in excess of $10 million. The Company has also requested a declaration
that MBE is required to use the Company in connection with its ICW project and
prohibiting MBE from continuing to breach the Joint Venture Agreement.
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On May 14, 1999, the Company notified MBE that the Company was
terminating the Joint Venture Agreement. On May 19, 1999, the Company received a
letter from MBE purporting to terminate the Joint Venture Agreement. The Joint
Venture Agreement provided that it could be terminated at any time by either
partner if the other partner breached any material term or condition of the
agreement; provided that the terminating partner will have provided the other
partner with written notice of the alleged breach and at least a sixty day
period to cure such alleged breach. Previously, as required under the Joint
Venture Agreement, on February 4, 1999 and February 19, 1999, the Company had
given to MBE notice that MBE was in default of the Joint Venture Agreement in
connection with five separate items, and demanded that MBE cure the breaches
within sixty days.
The Company's May 14, 1999 letter to MBE states five reasons for the
termination: MBE's refusal to authorize the installation of data port terminals
as required under the sales agreement between the MBE Joint Venture and a
customer; MBE's refusal to allow the MBE Joint Venture to market and sell the
data port terminals; MBE's ongoing failure to commit adequate and appropriate
resources to MBE Joint Venture sales and marketing to effectuate a reasonable
number of sales of business center equipment; MBE's failure to acknowledge the
Company's ownership of the trademark Business Express(R) and its actions
inconsistent with the Company's ownership of the mark; and MBE's refusal to
timely meet with the Company to discuss and conclude a sales and marketing
budget for the fiscal year commencing April 1, 1999.
On January 7, 2000, the Company filed a First Amended Answer and
Counterclaims. As set forth above, the Company has denied the allegations set
forth in MBE's original complaint of September 1998. In addition to the
counterclaims previously set forth, the Company has stated additional claims
against MBE, including that MBE misrepresented to USA that MBE's franchisees
would be capable of selling the MBE Joint Venture's products. The new
counterclaims seek relief from MBE for intentional and negligent
misrepresentation and seek recovery of an unspecified amount of money damages in
excess of $10 million dollars as well as punitive damages. The Company has
eliminated its demand for injunctive relief regarding the Joint Venture
Agreement and ICW Project as described above because the MBE Joint Venture has
now been terminated.
On January 7, 2000, MBE filed a First Amended Complaint. In addition to
the allegations set forth in MBE's original complaint, MBE has stated numerous
additional claims against the Company, including that the Company failed to
develop for MBE a working ICW Project as promised, the Company owes MBE $392,760
under the Joint Venture Agreement, the Company has breached the Joint Venture
Agreement, and the Company's technology was not viable and "public proof" as
promised. The new claims seek relief from the Company for intentional
misrepresentation, breach of the Joint Venture Agreement, breach of express and
implied warranty, breach of fiduciary duty, and trade libel, and seek recovery
of an unspecified amount of money damages in excess of $10 million dollars as
well as punitive damages.
On January 27, 2000 MBE filed a motion to dismiss three claims of the
Company's amended counterclaims against MBE. Subsequent to this filing, MBE
withdrew a portion of its motion to dismiss that relates to one of the Company's
claims. By court order dated May 3, 2000, MBE's motion to dismiss was denied in
part and granted in part. None of the Company's claims against MBE were
dismissed.
Both parties have requested a jury trial. By court order, discovery is
required to be completed by March 20, 2001 and the jury trial is scheduled to
commence on June 18, 2001.
On June 26, 2000, MBE filed its Answer to the Company's First Amended
Counterclaims in which it denied the Company's counterclaims and asserted
various affirmative defenses.
By court order, a mandatory settlement conference is scheduled for
August 9, 2000.
The Company believes that the claims of MBE are without merit and that
it will prevail in this matter. Accordingly, there has been no provision
recorded for this action in the accompanying consolidated financial statements.
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MANAGEMENT
Directors and Executive Officers
The Directors and executive officers of the Company, together with
their ages and business backgrounds are as follows.
Name Age Position(s) Held
---- --- ----------------
George R. Jensen, Jr. 51 Chief Executive
Officer, Chairman of the
Board of Directors
Stephen P. Herbert 36 President, Director
Haven Brock Kolls, Jr. 33 Vice President - Research
and Development
Leland P. Maxwell 53 Senior Vice President,
Chief Financial Officer,
Treasurer
Michael K. Lawlor 39 Vice President - Markting and
Sales
William W. Sellers (1)(2) 77 Director
Henry B. duPont Smith 37 Director
William L. Van Alen, Jr. (1)(2) 65 Director
Steven Katz (1) 50 Director
Douglas M. Lurio (2) 43 Director
Edwin R. Boynton 45 Director
(1) Member of Compensation Committee
(2) Member of Audit Committee
Each Director holds office until the next Annual Meeting of
Shareholders and until his successor has been elected and qualified. Effective
May 1, 2000, Peter G. Kapourelos resigned from the Board of Directors.
George R. Jensen, Jr., has been, Chief Executive Officer and Director
of the Company since January 1992. Mr. Jensen is the founder, and was Chairman,
Director, and Chief Executive Officer of American Film Technologies, Inc.
("AFT") from 1985 until 1992. AFT was in the business of creating color imaged
versions of black-and-white films. From 1979 to 1985, Mr. Jensen was Chief
Executive Officer and President of International Film Productions, Inc. Mr.
Jensen was the Executive Producer of the twelve hour miniseries, "A.D.", a $33
million dollar production filmed in Tunisia. Procter and Gamble, Inc., the
primary source of funds, co-produced and sponsored the epic, which aired in
March 1985 for five consecutive nights on the NBC network. Mr. Jensen was also
the Executive Producer for the 1983 special for public television, " A Tribute
to Princess Grace". From 1971 to 1978, Mr. Jensen was a securities broker,
primarily for the firm of Smith Barney, Harris Upham. Mr. Jensen was chosen 1989
Entrepreneur of the Year in the high technology category for the Philadelphia,
Pennsylvania area by Ernst & Young LLP and Inc. Magazine. Mr. Jensen received
his Bachelor of Science Degree from the University
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of Tennessee and is a graduate of the Advanced Management Program at the
Wharton School of the University of Pennsylvania.
Stephen P. Herbert was elected a Director of the Company in April 1996,
and joined the Company on a full-time basis on May 6, 1996. Mr. Herbert was
elected as President in June 1999. Prior to joining the Company and since 1986,
Mr. Herbert had been employed by Pepsi-Cola, the beverage division of PepsiCo.,
Inc. From 1994 to April 1996, Mr. Herbert was a Manager of Market Strategy. In
such position he was responsible for directing development of market strategy
for the vending channel and subsequently the supermarket channel for Pepsi-Cola
in North America. Prior thereto, Mr. Herbert held various sales and management
positions with Pepsi-Cola. Mr. Herbert graduated with a Bachelor of Science
degree from Louisiana State University.
Haven Brock Kolls, Jr., joined the Company on a full-time basis in May
1994 and was elected an executive officer in August 1994. In August 1997, Mr.
Kolls became a patent agent registered to practice before the United States
Patent and Trademark Office. From January 1992 to April 1994, Mr. Kolls was
Director of Engineering for International Trade Agency, Inc., an engineering
firm specializing in the development of control systems and management software
packages for use in the vending machine industry. Mr. Kolls was an electrical
engineer for Plateau Inc. from 1988 to December 1992. His responsibilities
included mechanical and electrical computer-aided engineering, digital
electronic hardware design, circuit board design and layout, fabrication of
system prototypes and software development. Mr. Kolls is a graduate of the
University of Tennessee with a Bachelor of Science Degree in Engineering.
Leland P. Maxwell joined the Company on a full-time basis on February
24, 1997 as Chief Financial Officer, Senior Vice President and Treasurer. Prior
to joining the Company, Mr. Maxwell was the corporate controller for Klearfold,
Inc., a privately-held manufacturer of specialty consumer packaging. From 1992
to 1996, Mr. Maxwell was the regional controller for Jefferson Smurfit/Container
Corporation of America, a plastic packaging manufacturer, and from 1986 to 1992
was the divisional accounting manager. Prior thereto, he held financial
positions with Safeguard Business Systems and Smithkline-Beecham. Mr. Maxwell
received a Bachelor of Arts degree in History from Williams College and a Master
of Business Administration-Finance from The Wharton School of the University of
Pennsylvania. Mr. Maxwell is a Certified Public Accountant.
Michael K. Lawlor joined the Company on a full-time basis in 1997 and
was promoted to Senior Vice President, Sales and Marketing in September 1999.
Prior to joining the Company, Mr. Lawlor was employed by Aladdin Industries, a
leading manufacturer of promotional drinkware, as Director of Restaurant Sales.
From 1986 to 1995, Mr. Lawlor was employed in various sales capacities by
Pepsi-Cola and was National Accounts Sales Manager when he departed in 1995. Mr.
Lawlor received an undergraduate degree in Marketing from the University of
Texas.
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William W. Sellers joined the Board of Directors of the Company in May
1993. Mr. Sellers founded The Sellers Company in 1949 which has been nationally
recognized as the leader in the design and manufacture of state-of-the-art
equipment for the paving industry. Mr. Sellers has been awarded five United
States patents and several Canadian patents pertaining to this equipment. The
Sellers Company was sold to Mechtron International in 1985. Mr. Sellers is
Chairman of the Board of Sellers Process Equipment Company which sells
products and systems to the food and other industries. Mr. Sellers is actively
involved in his community. Mr. Sellers received his undergraduate degree from
the University of Pennsylvania.
Henry B. duPont Smith joined the Board of Directors of the Company in
May 1994. Since January 1992, Mr. Smith has been a Vice President of The
Rittenhouse Trust Company and since September 1991 has been a Vice President of
Rittenhouse Financial Services, Inc. From September 1991 to December 1992, he
was a registered representative of Rittenhouse Financial Securities, Inc. Mr.
Smith was an Assistant Vice President of Mellon Bank, N.A. from March 1988 to
July 1991, and an investment officer of Provident National Bank from March 1985
to March 1988. Mr. Smith received a Bachelor of Arts degree in Accounting in
1984 from Franklin & Marshall College.
William L. Van Alen, Jr., joined the Board of Directors of the Company
in May 1993. Mr. Van Alen is President of Cornerstone Entertainment, Inc., an
organization engaged in the production of feature films of which he was a
founder in 1985. Since 1996, Mr. Van Alen has been President and a Director of
The Noah Fund, a publicly traded mutual fund. Prior to 1985, Mr. Van Alen
practiced law in Pennsylvania for twenty-two years. Mr. Van Alen received his
undergraduate degree in Economics from the University of Pennsylvania and his
law degree from Villanova Law School.
Steven Katz joined the Board of Directors in May 1999. He is President
of Steven Katz & Associates, Inc., a management consulting firm specializing in
strategic planning and corporate development for technology and service-based
companies in the health care, environmental, telecommunications and Internet
markets. Mr. Katz's prior experience includes five years with Price Waterhouse &
Co. in audit, tax and management advisory services; two years of corporate
planning with Revlon, Inc.; five years with National Patent Development
Corporation (NPDC) in strategic planning, merger and acquisition, technology
in-licensing and out-licensing, and corporate turnaround experience as President
of three NPDC subsidiaries; and two years as a Vice President and General
Manager of a non-banking division of Citicorp, N.A.
Douglas M. Lurio joined the Board of Directors of the Company in June
1999. Mr. Lurio is President of Lurio & Associates, P.C., attorneys-at-law,
which he founded in 1991. He specializes in the practice of corporate and
securities law. Prior thereto, he was a partner with Dilworth, Paxson LLP. Mr.
Lurio received a Bachelor of Arts Degree in Government from Franklin & Marshall
College, a Juris Doctor degree from Villanova Law School, and a Masters in Law
(Taxation) from Temple Law School.
Edwin R. Boynton joined the Board of Directors in July 1999. He is a
partner of Stradley Ronon Stevens & Young LLP, and is a member of and currently
the chair of the firm's estates department. Mr. Boynton received his bachelor of
arts degree from Harvard University in 1976 and his Juris Doctor degree from
Duke University in 1979.
30
<PAGE>
Executive Compensation
The following table sets forth certain information with respect to
compensation paid or accrued by the Company during the fiscal years ended June
30, 1998, June 30, 1999 and June 30, 2000 to each of the executive officers of
the Company named below. Except as set forth below, no individual who was
serving as an executive officer of the Company at the end of the fiscal years
ended June 30, 1998, June 30, 1999 or June 30, 2000 received salary and bonus in
excess of $100,000 in any such fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------------
NAME AND PRINCIPAL FISCAL SALARY BONUS(1) OTHER ANNUAL
POSITION YEAR COMPENSATION
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
George R. Jensen, Jr., Chief 2000 $117,500 $50,000 $80,000 (2)
Executive Officer 1999 $100,000 0 --
1998 $100,000 0 --
---------------------------------------------------------------------------------------------
Stephen P. Herbert, 2000 $107,500 $94,000 $80,000 (2)
President
---------------------------------------------------------------------------------------------
Leland P. Maxwell, CFO and 2000 $ 99,000 $29,000 --
Treasurer
---------------------------------------------------------------------------------------------
H. Brock Kolls, Senior Vice 2000 $105,000 $44,000 $80,000 (2)
President, Research and
Development
---------------------------------------------------------------------------------------------
Michael K. Lawlor, Senior 2000 $ 83,200 $35,500 $43,000 (3)
Vice President Sales and
Marketing
---------------------------------------------------------------------------------------------
</TABLE>
(1) Represents shares of Common Stock issued to the executive officers during
the fiscal year valued at $2.00 per share, the closing bid price on the date of
issuance. For Mr. Lawlor, the bonus also includes a $5,500 sales commission.
(2) Represents shares of Common Stock issuable to such executive officers if
employed by the Company on June 30, 2002. The shares have been valued at $2.00
per share, the closing bid price of the Common Stock on the date of grant.
(3) Represents payment by the Company of relocation expenses.
The following table sets forth information regarding stock options
granted during fiscal year 2000 to the executive officers of the Company named
below:
OPTION GRANTS DURING FISCAL YEAR ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
NAME NUMBER OF PERCENTAGE OF EXERCISE EXPIRATION DATE
SECURITIES TOTAL OPTIONS PRICE PER
UNDERLYING GRANTED TO SHARE
OPTIONS EMPLOYEES IN
GRANTED FISCAL YEAR
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stephen P. Herbert 45,000 37.5% $2.00 November 23, 2004
------------------------------------------------------------------------------------------
Leland P. Maxwell 15,000 12.5% $2.00 November 23, 2004
------------------------------------------------------------------------------------------
H. Brock Kolls 30,000 25% $2.00 November 23, 2004
------------------------------------------------------------------------------------------
Michael K. Lawlor 20,000 16.7% $2.00 August 5, 2004
------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Executive Employment Agreements
The Company has entered into an employment agreement with Mr. Jensen
which expires June 30, 2002. The Agreement is automatically renewed from year to
year thereafter unless canceled by Mr. Jensen or the Company. The agreement
provides for an annual base salary of $135,000 per year effective March 1, 2000.
Mr. Jensen is entitled to receive such bonus or bonuses as may be awarded to him
by the Board of Directors. In determining whether to pay such a bonus, the Board
would use its subjective discretion. The Agreement requires Mr. Jensen to devote
his full time and attention to the business and affairs of the Company, and
obligates him not to engage in any investments or activities which would compete
with the Company during the term of the Agreement and for a period of one year
thereafter. The agreement provides that if Mr. Jensen is employed by the Company
on June 30, 2002, the Company will issue to him 40,000 shares of Common Stock.
The agreement also grants to Mr. Jensen in the event a "USA
Transaction" (as defined below) occurs after the date thereof that number of
shares of Common Stock as shall when issued to him equal eight percent of all
the then issued and outstanding shares of Common Stock (the "Rights"). Mr.
Jensen is not required to pay any additional consideration for the Rights. At
the time of any USA Transaction, all of the shares of Common Stock underlying
the Rights are automatically deemed to be issued and outstanding immediately
prior to any USA Transaction, and are entitled to be treated as any other issued
and outstanding shares of Common Stock in connection with such USA Transaction.
The term USA Transaction is defined as (i) the acquisition of fifty-one
percent or more of the then outstanding voting securities entitled to vote
generally in the election of Directors of the Company by any person, entity or
group, or (ii) the approval by the shareholders of the Company of a
reorganization, merger, consolidation, liquidation, or dissolution of the
Company, or the sale, transfer, lease or other disposition of all or
substantially all of the assets of the Company.
31
<PAGE>
The Rights are irrevocable and fully vested and will not be affected by
the termination of Mr. Jensen's employment with the Company for any reason
whatsoever. If a USA Transaction shall occur at a time when there are not a
sufficient number of authorized but unissued shares of Common Stock, then the
Company shall as a condition of such USA Transaction promptly take any and all
appropriate action to make available a sufficient number of shares of Common
Stock. In the alternative, the Company may structure the USA Transaction so that
Mr. Jensen would receive the same amount and type of consideration in connection
with the USA Transaction as any other holder of Common Stock.
On January 21, 1999, Mr. Jensen purchased ten (10) units pursuant to
the Company's private placement offering of the Senior Notes for $100,000. In
full payment therefore, Mr. Jensen has agreed to forego any base salary
otherwise payable to him under his employment agreement during the period of
time commencing on April 1, 1999 and ending on June 30, 2000, or such longer
period of time as may be required based upon his monthly net base salary after
all applicable withholding taxes and other deductions.
The Company has entered into an employment agreement with Mr. Herbert
which expires on June 30, 2002. The agreement is automatically renewed from year
to year thereafter unless canceled by Mr. Herbert or the Company. The Agreement
provides for an annual base salary of $125,000 per year effective March 1, 2000.
Mr. Herbert is entitled to receive such bonus or bonuses as the Board of
Directors
32
<PAGE>
may award to him. The Agreement requires Mr. Herbert to devote his full time and
attention to the business and affairs of the Company and obligates him not to
engage in any investments or activities which would compete with the Company
during the term of the agreement and for a period of one year thereafter. The
agreement provides that if Mr. Herbert is employed by the Company on June 30,
2002, the Company will issue to him 40,000 shares of Common Stock.
Mr. Kolls has entered into an employment agreement with the Company
which expires on June 30, 2002, and is automatically renewed from year to year
thereafter unless canceled by Mr. Kolls or the Company. The agreement provides
for an annual base salary of $120,000 per year effective March 31, 2000. Mr.
Kolls is also entitled to receive such bonus or bonuses as may be awarded to him
by the Board of Directors. The Agreement requires Mr. Kolls to devote his full
time and attention to the business and affairs of the Company, and obligates him
not to engage in any investments or activities which would compete with the
Company during the term of the agreement and for a period of one year
thereafter. The agreement provides that if Mr. Kolls is employed by the Company
on June 30, 2002, the Company will issue to him 40,000 shares of Common Stock.
Mr. Maxwell has entered into an employment agreement with the Company
which expires on June 30, 2001, and is automatically renewed from year to year
thereafter unless cancelled by Mr. Maxwell or the Company. The agreement
provides for an annual base salary of $108,000 effective March 1, 2000. Mr.
Maxwell is also entitled to receive such bonus or bonuses as by the Board of
Directors may award to him. The Agreement requires Mr. Maxwell to devote his
full time and attention to the business and affairs of the Company, and
obligates him not to engage in any investments or activities which would compete
with the Company during the term of the agreement and for a period of one year
thereafter.
Mr. Lawlor has entered into an employment agreement with the Company
which expires on June 30, 2001, and is automatically renewed from year to year
thereafter unless canceled by Mr. Lawlor or the Company. The agreement provides
for an annual base salary of $100,000 effective March 1, 2000. Mr. Lawlor is
also entitled to receive such bonus or bonuses as by the Board of Directors may
award to him. The Agreement requires Mr. Lawlor to devote his full time and
attention to the business and affairs of the Company, and obligates him not to
engage in any investments or activities which would compete with the Company
during the term of the agreement and for a period of one year thereafter.
Director Compensation and Stock Options
Members of the Board of Directors do not currently receive any cash
compensation for serving on the Board of Directors.
In July 1993, the Company issued to each of Messrs. Sellers and Van
Alen fully vested options to purchase 10,000 shares of Common Stock at an
exercise price of $2.50 per share. In March 1998, the expiration date of these
options was extended from June 30, 1998 to June 30, 2000 and in April 1998, the
exercise price was reduced from $2.50 to $1.50.
In March 1995, the Company issued to Mr. Smith fully vested options to
purchase 10,000 shares of Common Stock, to Mr. Sellers fully vested options to
purchase 5,500 shares of Common Stock, and to Mr. Van Alen fully vested options
to purchase 2,500 shares of Common Stock. The exercise price of these options is
$2.50 per share and they must be exercised on or before February 29, 2000. In
April 1998, the exercise price of these options was reduced from $2.50 to $1.50.
33
<PAGE>
In March 1998, the Company extended the expiration date of the
following options to purchase shares of Common Stock from June 30, 1998 to the
close of business on June 30, 2000, to the following Directors of the Company:
William W. Sellers - 10,000 options; and William L. Van Alen, Jr. - 10,000
options.
In April 1998, the Company reduced from $2.50 to $1.50 the exercise
price of the following options to purchase Common Stock issued to the following
Directors of the Company: William W. Sellers - 15,500 options; William L. Van
Alen, Jr. - 12,500 options; and Henry B. duPont Smith - 10,000 options.
In November 1998, all of the Common Stock underlying the above options
was registered by the Company under the Act, for resale by the holder thereof.
Such registration was at the Company's cost and expense.
During June and July 1999, the Company granted 10,000 options to each
of the Directors who were not executive officers of the Company. Each option is
exercisable at $2.00 per share at any time for five years following the vesting
thereof.
The Board of Directors is responsible for awarding stock options. Such
awards are made in the subjective discretion of the Board. Other than the
repricing of the options by the Company in April 1998, the exercise price of all
the above options represents on the date of issuance of such options an amount
equal to or in excess of the market value of the Common Stock issuable upon the
exercise of the options. In connection with the April 1998 stock option
repricing, the exercise price of all these options were below the fair market
value on the date of the repricing, therefore, the Company recorded a charge to
compensation expense during fiscal year 1998.
All of the foregoing options are non-qualified stock options and not
part of a qualified stock option plan and do not constitute incentive stock
options as such term is defined under Section 422 of the Internal Revenue Code,
as amended, and are not part of an employee stock purchase plan as described in
Section 423 thereunder.
34
<PAGE>
Executive Stock Options
In April 1998, the Company issued to each of Messrs. Herbert, Kolls and
Maxwell options to purchase up to 5,000 shares of Common Stock at $4.50 per
share. The options become vested over a one-year period at the rate of 1,250
per quarter. The options must be exercised within five years of vesting.
In April 1998, the Company permanently reduced the exercise price to
$1.50 of the following options to purchase Common Stock: Haven Brock Kolls, Jr.
- 10,000 options from $2.50 to $1.50; Stephen P. Herbert - 10,000 options from
$4.50 to $1.50; and Leland P. Maxwell - 10,000 options from $4.50 to $1.50.
35
<PAGE>
In June 1999, the Company granted an aggregate of 470,000 options to
the executive officers as follows: Mr. Jensen - 180,000 options; Mr. Herbert -
110,000; Mr. Kolls - 100,000 options; Mr. Maxwell - 40,000 options; Mr. Lawlor -
20,000 options; and Mr. Donahue - 20,000 options. All of Mr. Jensen's options
became vested immediately. All of the other executive officers' options would
vest as follows: one-third immediately; one-third on June 17, 2000, and
one-third on June 17, 2001. Each option is exercisable at $2.00 per share at any
time for five years following vesting thereof.
In November 1999, the Company issued fully vested options to purchase
an aggregate of 90,000 shares of Common Stock to its executive officers as
follows: Stephen P. Herbert - 45,000 options; Haven Brock Kolls - 30,000
options; and Leland Maxwell - 15,000 options. Each option is exercisable at
$2.00 per share of Common Stock at any time within five years following
issuance.
The Board of Directors is responsible for awarding stock options. Such
awards are made in the subjective discretion of the Board. Other than the
repricing of the options by the Company in April 1998, the exercise price of all
the above options represents on the date of issuance of such options an amount
equal to or in excess of the market value of the Common Stock issuable upon the
exercise of the options. In connection with the April 1998 stock options
repriced, the exercise prices of all those options were below the fair market
value on the date of the repricing, therefore, the Company recorded a charge to
compensation expense during fiscal year 1998.
36
<PAGE>
All of the foregoing options are non-qualified stock options and not
part of a qualified stock option plan and do not constitute incentive stock
options as such term is defined under Section 422 of the Internal Revenue Code,
as amended, and are not part of an employee stock purchase plan as described in
Section 423 thereunder.
PRINCIPAL SHAREHOLDERS
Common Stock
The following table sets forth, as of March 31, 2000, the
beneficial ownership of the Common Stock of each of the Company's directors and
executive officers, as well as by the Company's directors and executive officers
as a group. Except as set forth below, the Company is not aware of any
beneficial owner of more than five percent of the Common Stock. Except as
otherwise indicated, the Company believes that the beneficial owners of the
Common Stock listed below, based on information furnished by such owners, have
sole investment and voting power with respect to such shares, subject to
community property laws where applicable.
37
<PAGE>
Number of Shares
Name and Address of Common Stock Percent
of Beneficial Owner Beneficially Owned(1) of Class(2)
------------------- --------------------- -----------
George R. Jensen, Jr. 660,000 shares(3) 3.2%
16 Marlborough Road
Newtown Square, Pennsylvania 19073
Stephen P. Herbert 178,717 shares(4) *
536 West Beach Tree Lane
Strafford, Pennsylvania 19087
Haven Brock Kolls, Jr. 157,183 shares(5) *
1573 Potter Drive
Pottstown, PA 19464
Leland P. Maxwell 75,884 shares(6) *
401 Dartmouth Rd.
Bryn Mawr, Pennsylvania 19010
Michael K. Lawlor 51,717 shares(7) *
131 Lisa Drive
Paoli, PA 19301
Edwin R. Boynton 120,500 shares(8) *
104 Leighton Drive
Bryn Mawr, Pennsylvania 19010
Steven Katz 10,000 shares(9) *
20 Rebel Run Drive
East Brunswick, New Jersey 08816
Douglas M. Lurio 63,213 shares(10) *
2005 Market Street, Suite 2340
Philadelphia, Pennsylvania 19103
William W. Sellers 454,075 shares(11) 2.22%
394 East Church Road
King of Prussia, Pennsylvania 19406
Henry B. duPont Smith 50,000 shares(12) *
350 Mill Bank Road
Bryn Mawr, Pennsylvania 19010
William L. Van Alen, Jr. 52,500 shares(13) *
Cornerstone Entertainment, Inc.
P.O. Box 727
Edgemont, Pennsylvania 19028
All Directors and Executive Officers
As a Group (11 persons) 1,873,788 shares(14) 9.2%
---------
*Less than one percent (1%)
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and derives from either voting or investment
power with respect to securities. Shares of Common Stock issuable upon
conversion of the Preferred Stock, or shares of Common Stock issuable upon
exercise of options currently exercisable, or exercisable within 60 days of
March 31, 2000, are deemed to be beneficially owned for purposes hereof.
38
<PAGE>
(2) On March 31, 2000 there were 13,083,732 shares of Common Stock and 595,027
shares of Series A Preferred Stock issued and outstanding. For purposes of
computing the percentages under this table, it is assumed that all shares of
issued and outstanding Preferred Stock have been converted into 595,027 shares
of Common Stock and that all Management Options which are fully vested as of
March 31, 2000 (or within 60-days of March 31, 2000) have been converted into
823,007 shares of Common Stock. Of the 1,003,007 Management Options issued as of
March 31, 2000, only 823,007 are vested (or become vested within 60-days), and
are included in this table. For purposes of computing such percentages it has
also been assumed that all of the remaining 1995 Warrants have been exercised
for 67,300 shares of Common Stock, all of the remaining 1996 Warrants have been
exercised for 86,800 shares of Common Stock, all of the 1996-B Warrants have
been exercised for 4,000 shares of Common Stock, all of the 1997 Warrants have
been exercised for 1,500 shares of Common Stock, all of the Warrants issued to
affiliates and/or consultants to GEM Advisors, Inc. have been exercised for
100,000 shares of Common Stock, all of the 1998-A Warrants have been exercised
for 4,000 shares of Common Stock, all of the 1998-B Warrants have been exercised
for 5,000 shares of Common Stock, and all of the accrued and unpaid dividends on
the Preferred Stock as of March 31, 2000 have been converted into 399,145 shares
of Common Stock. It has also been assumed that the 1999-A Warrants have been
exercised for 15,000 shares of Common Stock, all of the 1999-B Warrants have
been exercised for 3,452,250 shares of Common Stock, all of the Senior Notes
have been converted into 1,637,200 shares of Common Stock, and all of the
Consultant Warrants have been exercised into 125,400 shares of Common Stock.
Therefore, for purposes of computing the percentages under this table, there are
20,411,101 shares of Common Stock issued and outstanding.
(3) Includes 200,000 shares of Common Stock held by Mr. Jensen with his children
as joint tenants with right of survivorship, 180,000 shares of Common Stock
issuable upon the exercise of options, 80,000 shares issuable upon conversion of
Senior Note, and 200,000 shares issuable upon exercise of 1999-B Warrants. Does
not include the right granted to Mr. Jensen under his Employment Agreement to
receive eight percent (8%) of the issued and outstanding Common Stock upon the
occurrence of a USA Transaction (as defined herein). See "Executive Employment
Agreements".
(4) Includes 136,667 shares of Common Stock issuable to Mr. Herbert upon the
exercise of options and 2,000 shares beneficially owned by his child.
(5) Includes 103,333 shares of Common Stock issuable to Mr. Kolls upon the
exercise of options, 12,000 shares of Common Stock owned by his spouse and
12,000 shares issuable to his spouse upon conversion of her Senior Note.
(6) Includes 43,334 shares of Common Stock issuable to Mr. Maxwell upon the
exercise of options.
(7) Includes 36,667 shares of Common Stock issuable to Mr. Lawlor upon exercise
of options.
(8) Includes 5,500 shares of Common Stock issuable upon conversion of 5,500
shares of Series A Preferred Stock. Includes 10,000 shares of Common Stock
issuable upon exercise of options, 20,000 shares issuable upon conversion of his
Senior Note, and 10,000 shares issuable upon exercise of 1999-B Warrants. Does
not include any shares of Common Stock issuable upon conversion of any accrued
and unpaid dividends on the Series A Preferred Stock.
<PAGE>
(9) Includes 10,000 shares of Common Stock issuable upon exercise of options.
(10) Includes 31,213 shares of Common Stock held jointly with Mr. Lurio's
spouse, 10,000 shares of Common Stock issuable upon exercise of options, 12,000
shares issuable upon conversion of his Senior Note, and 10,000 shares issuable
upon exercise of 1999-B Warrants.
(11) Includes 17,245 shares of Common Stock owned by the Sellers Pension Plan of
which Mr. Sellers is a trustee, 4,651 shares of Common Stock owned by Sellers
Process Equipment Company of which he is a Director, and 9,929 shares of Common
Stock owned by Mr. Seller's wife. Includes 25,500 shares of Common Stock
issuable upon exercise of options, 28,000 shares issuable upon conversion of
his Senior Note, and 130,000 shares issuable upon exercise of 1999-B Warrants.
39
<PAGE>
(12) Includes 12,000 shares of Common Stock issuable upon conversion of the
12,000 shares of Preferred Stock beneficially owned by Mr. Smith. Includes
20,000 shares of Common Stock issuable upon exercise of options. Includes 8,000
shares of Common Stock issuable upon conversion of the 1996 Warrants held by
trusts for the benefit of Mr. Smith's children of which he is a trustee. Does
not include any shares of Common Stock issuable upon conversion of any accrued
and unpaid dividends on the Series A Preferred Stock.
(13) Includes 22,500 shares of Common Stock issuable to Mr. Van Alen upon
exercise of options and 10,000 shares issuable upon conversion of 1999-B
Warrants.
(14) Includes all shares of Common Stock described in footnotes (2) through (13)
above.
Preferred Stock
The following table sets forth, as of March 31, 2000 the beneficial
ownership of the Preferred Stock by the Company's directors and executive
officers, as well as by the Company's directors and executive officers as a
group. Except as set forth below, the Company is not aware of any beneficial
owner of more than five percent of the Preferred Stock. Except as otherwise
indicated, the Company believes that the beneficial owners of the Preferred
Stock listed below, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable.
Number of Shares
Name and Address of of Preferred Stock Percent
Beneficial Owner Beneficially Owned of Class(l)
------------------- ------------------ -----------
Edwin R. Boynton
104 Leighton Avenue
Bryn Mawr, Pennsylvania 19010 5,500 *
Henry B. duPont Smith
350 Mill Bank Road
Bryn Mawr, Pennsylvania 19010 12,000(2) 2.0%
All Directors and
Executive Officers
As a Group (11 persons) 17,500 3.1%
--------------
*Less than one percent (1%)
(1) There were 595,027 shares of Preferred Stock issued and outstanding as of
March 31, 2000.
(2) Includes 2,000 shares of Preferred Stock held by trusts for the benefit of
Mr. Smith's children of which he is a trustee.
40
<PAGE>
CERTAIN TRANSACTIONS
At June 30, 1999 and 1998, approximately $84,000 and $26,000
respectively, of the Company's accounts payable are due to several shareholders
for various legal and technical services performed. For the years ended June 30,
1999 and June 30, 1998, the Company incurred approximately $381,000 and $340,000
respectively for these services.
41
<PAGE>
On January 21, 1999, Mr. Jensen purchased ten units pursuant to the
Company's private placement offering of Senior Notes for $100,000. In full
payment therefore, Mr. Jensen has agreed to forego any base salary otherwise
payable to him under his employment agreement during the period of time
commencing on April 1, 1999 and ending on June 30, 2000, or such longer period
of time as may be required based upon his monthly net base salary after all
applicable withholding taxes and other deductions.
In June and July 1999, the Company issued options to purchase an
aggregate of 470,000 shares of Common Stock to its executive officers and an
aggregate of 70,000 shares of Common Stock to its directors who were not
executive officers. Each option is exercisable at $2.00 per share of Common
Stock. See "Management - Director Compensation and Stock Options" and "Executive
Stock Options".
In July 1999, the Company extended the expiration dates until June 30,
2001 of the options to acquire Common Stock held by the following directors,
officers, and employees: Adele Hepburn - 77,000 options; H. Brock Kolls - 20,000
options; Henry duPont Smith - 10,000 options; William Sellers - 15,500 options;
and William Van Alen - 12,500 options. All of the foregoing options would have
expired in the first two calendar quarters of the year 2000 or the first
calendar quarter of year 2001.
During the fiscal year ended June 30, 1999, the Company paid
Lurio & Associates, P.C., of which Mr. Lurio is President, professional fees of
approximately $155,000 for legal services rendered to the Company by such law
firm.
During the fiscal year ended June 30, 1999, the Company paid Steven
Katz & Associates, of which Mr. Katz is President, professional fees of
approximately $15,500 for consulting services.
In August 1999, the Company issued to Stephen P. Herbert, President of
the Company, an aggregate of 25,000 shares of Common Stock. Such Common Stock
was issued in exchange for services rendered or to be rendered to the Company by
Mr. Herbert. The shares of Common Stock were valued at $2.00 per share, the
closing bid price on the date of the grant. The Company has registered these
shares under the Act.
In August 1999, the Company agreed to issue to Leland P. Maxwell, Chief
Financial Officer of the Company, an aggregate of 5,691 shares of Common Stock.
Such Common Stock was issued in exchange for services rendered or to be rendered
to the Company by Mr. Maxwell. The shares of Common Stock were valued at $2.00
per share, the closing bid price on the date of the grant. The Company has
registered these shares under the Act.
42
<PAGE>
In August 1999, the Board of Directors authorized the Company to issue
to Michael Lawlor, Vice President of the Company, an aggregate of up to 25,000
shares of Common Stock. Such Common Stock was issued in exchange for services
rendered and to be rendered to the Company by Mr. Lawlor. The shares of Common
Stock were valued at $2.00 per share, the closing bid price on the date of the
grant. The Company has registered these shares under the Act.
In August 1999, the Company also issued to Mr. Lawlor fully vested
options to acquire up to 20,000 shares of Common Stock at $2.00 per share. The
options are exercisable at any time within five years following issuance. The
Company has agreed to register under the Act the Common Stock underlying the
options for resale by Mr. Lawlor.
In August 1999, the Company issued to Joseph Donahue, a former
Vice President of the Company, an aggregate of 7,500 shares of Common Stock.
Such Common Stock was issued in exchange for services to be rendered to the
Company by Mr. Donahue. The shares of Common Stock were valued at $2.00 per
share, the closing bid price on the date of the grant. The Company has
registered these shares under the Act.
In August 1999, the Company issued to each of Stephen Herbert,
President, Leland Maxwell, Chief Financial Officer, and Haven Brock Kolls,
Vice-President - Research and Development, 2,000 shares of Common Stock. Such
Common Stock was issued in exchange for services rendered or to be rendered to
the Company. The shares were valued at $2.00 per share, the closing bid price on
the date of grant. The Company has registered these shares under the Act.
In November 1999, the Company issued fully vested options to purchase
an aggregate of 90,000 shares of Common Stock to its executive officers as
follows: Stephen P. Herbert - 45,000 options; Haven Brock Kolls - 30,000
options; and Leland Maxwell - 15,000 options. Each option is exercisable at
$2.00 per share of Common Stock. The options are exercisable at any time within
five years following issuance. The Company has agreed to register the Common
Stock underlying these options for resale under the Act.
During February 2000, the Company issued an aggregate of 87,500 shares
of Common Stock to five executive officers: George R. Jensen, Jr. - 25,000
shares; Stephen P. Herbert - 20,000 shares; Haven Brock Kolls, Jr. - 20,000
shares; Leland P. Maxwell - 12,500 shares; and Michael Lawlor - 10,000 shares.
Such shares were issued as a bonus for services rendered and to be rendered to
the Company during calendar year 2000. The shares were valued at $2.00 per
share, the closing bid price on the date of issuance. The Company has registered
these shares under the Act.
In February 2000, in connection with his relocation to the
Philadelphia, Pennsylvania area, the Company agreed to pay the costs of
relocation for Michael Lawlor, Vice President of the Company. As of June 30,
2000, a total of approximately $43,000 has been paid for this purpose.
43
<PAGE>
SELLING SHAREHOLDERS
Each of the Selling Shareholders listed below is, as of the date
hereof, the holder of the number of shares of Common Stock set forth opposite
such Selling Shareholder's name. All of these securities were issued by the
Company to the Selling Shareholders pursuant to a transaction exempt from the
registration requirements of the Act and various state securities laws.
All of the Selling Shareholders purchased their 2,200,000 shares of
Common Stock pursuant to a private placement of the Company conducted in June
2000. The shares were purchased for $1.50 each of an aggregate of $3,300,000. In
July 2000, the purchase price was reduced to $1.00 per share or an aggregate of
$2,200,000. Pursuant to the subscription agreements entered into by each Selling
Shareholder and the Company, payment for the shares is to be made no later than
August 31, 2000. To date, no payments have been received by the Company. The
Company agreed to register all of such shares of Common Stock under the Act for
resale by the holder thereof.
The issuance by the Company of the Common Stock to the Selling
Shareholders was a transaction exempt from the registration requirements of the
Act and various state securities laws. The Company has agreed, at its expense,
to register all of such Common Stock for resale by the Selling Shareholders
under the Act. The Company expects to incur expenses of approximately $20,000 in
connection with the registration statement of which this Prospectus is a part.
The Common Stock may be sold from time to time by the Selling Shareholders
pursuant to this Prospectus. See "Plan of Distribution".
The following table sets forth information with respect to each Selling
Shareholder and the respective amounts of Common Stock that may be offered
pursuant to this Prospectus. None of the Selling Shareholders has, or within the
past three years has had, any position, office or other material relationship
with the Company, except as noted below. Except as specifically set forth below,
following the offering, and assuming all of the Common Stock offered hereby has
been sold, none of the Selling Shareholders will beneficially own one percent
(1%) or more of the Common Stock.
44
<PAGE>
<TABLE>
<CAPTION>
Beneficial Ownership
Selling Shareholder Common Stock Offered Hereby After Offering(1)
------------------- --------------------------- --------------------
Number Percent
------ -------
<S> <C> <C> <C>
Venture Capital USA 500,000
Angles Limited 500,000
Clipper Holdings Limited 500,000
DF Investment 500,000
Metropolitan Partners Ltd. 200,000
---------
Total 2,200,000
=========
___________
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and derives from either voting or investment
power with respect to the securities, and includes any shares of Common Stock
which a person has the right to acquire within 60-days of the date hereof.
</TABLE>
45
<PAGE>
MARKET FOR COMMON STOCK
The Common Stock and Preferred Stock are currently traded on the OTC
Electronic Bulletin Board under the symbols USTT and USTTP, respectively.
The high and low bid prices on the OTC Electronic Bulletin Board for
the Common Stock were as follows:
Fiscal
1998 High Low
---- ---- ---
First Quarter (through September 30, 1997) $ 8.00 $2.70
Second Quarter (through December 31, 1997) $ 6.00 $2.20
Third Quarter (through March 31, 1998) $ 4.90 $2.50
Fourth Quarter (through June 30, 1998) $ 4.60 $2.50
1999
----
First Quarter (through September 30, 1998) $ 3.10 $1.20
Second Quarter (through December 31, 1998) $ 1.70 $ .80
Third Quarter (through March 31, 1999) $ 3.20 $1.10
Fourth Quarter (through June 30, 1999) $ 4.75 $1.20
2000
----
First quarter (through September 30, 1999) $ 2.94 $1.63
Second quarter (through December 31, 1999) $ 6.56 $1.63
Third quarter (through March 31, 2000) $ 4.50 $2.19
Fourth Quarter (through June 30, 2000) $ 3.38 $1.31
Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
On March 31, 2000, there were 1,003,007 shares of Common Stock issuable
upon exercise of outstanding Management Options. See "Description of
Securities-Shares Eligible for Future Sale." Of such Management Options, 15,000
are exercisable at $5.00 per share, 81,500 are exercisable at $4.50 per share,
116,500 are exercisable at $2.50 per share, 656,167 are exercisable at $2.00 per
share, 117,100 are exercisable at $1.50 per share, and 5,000 are exercisable at
$.50 per share. In addition, there are 11,740 purchase rights exerciseable at
$10.00 per share. In January 2000, the exercise price of the purchase rights was
temporarily reduced to $2.00 through June 1, 2000, and in May 2000 the
expiration date was extended until June 30, 2000. In June 2000, the exercise
price of the purchase rights was reduced to $1.50 through July 31, 2000, and in
July 2000, the Company further reduced the exercise price to $1.00 and
authorized the Chairman to extend the July 31, 2000 expiration date for up to
sixty days. The Company has at its cost and expense, registered for resale
under the Act the resale of the Common Stock underlying the Management Options.
All of the Management Options have been issued by the Company to employees,
Directors, officers, and consultants.
As of March 31, 2000, there were 67,300 shares of Common Stock issuable
upon exercise of the outstanding 1995 Warrants, which when and if issued would
be freely tradeable under the Act. As of March 31, 2000, there are 86,800 shares
of Common Stock issuable upon exercise of the outstanding 1996 Warrants, which
when and if issued would be freely tradeable under the Act. As of March 31,
2000, there were 4,000 shares of Common Stock issuable upon exercise of the
outstanding 1996-B Warrants, which when and if issued would be freely tradeable
under the Act. As of March 31, 2000, there are 1,500 shares of Common Stock
issuable upon exercise of the outstanding 1997 Warrants, which when and if
issued
46
<PAGE>
would be freely tradeable under the Act. As of March 31, 2000, there were
100,000 shares of Common Stock issuable upon the exercise of outstanding
Warrants issued to affiliates and/or consultants to GEMA in connection with the
sale of Convertible Securities. As of March 31, 2000, there were 4,000 shares of
Common Stock issuable upon the exercise of the outstanding 1998-A Warrants,
which when and if issued would be freely tradeable under the Act. As of March
31, 2000, there were 5,000 shares of Common Stock issuable upon the exercise of
the outstanding 1998-B Warrants, which when and if issued would be freely
tradeable under the Act. As of March 31, 2000, there were 15,000 shares of
Common Stock issuable upon the exercise of the outstanding 1999-A Warrants,
3,452,250 shares issuable upon the exercise of the outstanding 1999-B Warrants
and 125,400 shares issuable upon exercise of the outstanding Consultant
Warrants, which when and if issued would be freely tradeable under the Act.
As of March 31, 2000, there were 1,637,200 shares of Common Stock issuable upon
conversion of the outstanding Senior Notes, which when and if issued would be
freely tradeable under the Act.
On March 31, 2000, there were 762 record holders of the Common Stock
and 634 record holders of the Preferred Stock.
The holders of the Common Stock are entitled to receive such dividends
as the Board of Directors of the Company may from time to time declare out of
funds legally available for payment of dividends. Through the date hereof, no
cash dividends have been declared on the Company's securities. No dividend may
be paid on the Common Stock until all accumulated and unpaid dividends on the
Preferred Stock have been paid. As of March 31, 2000, such accumulated
unpaid dividends amount to $3,991,449.
During the first quarter of calendar year 2000, certain holders of the
Company's Preferred Stock converted 27,350 shares into 27,350 shares of Common
Stock. Certain of these shareholders also converted cumulative preferred
dividends of $154,730 into 15,473 shares of Common Stock.
During the quarter ended March 31, 2000, certain holders of 146,900 of
the Company's 1999-A Warrants exercised them at $.50 per warrant, generating
$73,450 in gross proceeds to the Company.
During the quarter ended March 31, 2000, certain holders of 107,750 of
the Company's 1999-B Warrants exercised them at $2.00 per warrant, generating
$215,500 in gross proceeds to the Company.
During the quarter ended March 31, 2000, the holder of 10,000 of the
options exercised such options for 10,000 shares of Common Stock at $1.50 per
share and the holders of 6,500 options exercised such options for 6,500 shares
of Common Stock at $2.50 per share.
During the quarter ended March 31, 2000, an aggregate of 34,000
Consultant Warrants were exercised at $2.00 per share by Harmonic Research, Inc.
47
<PAGE>
DESCRIPTION OF SECURITIES
General
The Company is authorized to issue up to 62,000,000 shares of Common
Stock, no par value ("Common Stock"), and 1,800,000 shares of undesignated
Preferred Stock. As of the date hereof, 900,000 shares have been designated as
Series A Convertible Preferred Stock, no par value ("Series A Preferred Stock"),
and 350,000 shares have been designated as Series B Equity Participating
Preferred Stock ("Series B Preferred Stock"), no par value.
As of March 31, 2000, there were 13,083,732 shares of Common Stock
issued and outstanding and 595,027 shares of Series A Preferred Stock issued and
outstanding which are convertible into 595,027 shares of Common Stock. Through
March 31, 2000, a total of 515,123 shares of Preferred Stock have been converted
into 546,380 shares of Common Stock and $2,046,373 of accrued and unpaid
dividends thereon have been converted into 2,002,697 shares of Common Stock. As
of March 31, 2000, there were 762 record owners of the Common Stock and 634
record owners of the Preferred Stock.
On June 7, 1999 the Company effectuated a 1-for-10 reverse stock split
of all of its issued and outstanding Common Stock. Pursuant thereto, on the
effective date of the reverse stock split (i) each 10 shares of outstanding
Common Stock were reduced to one share of Common Stock; (ii) the number of
shares of Common Stock into which each outstanding warrant, purchase right or
option is exercisable was proportionately reduced on a 10-to-1 basis; (iii) the
exercise price of each outstanding warrant, purchase right, or option was
proportionately increased on a 1-to-10 basis; (iv) the number of share of Common
Stock into which each share of Series A Preferred Stock is convertible was
reduced from 10 shares to 1 share; (v) the conversion of the accrued and unpaid
dividends on the Series A Preferred Stock was increased from $1.00 to $10.00 per
share of Common Stock; and (vi) each share of Series B Preferred Stock was
converted into 4 shares of Common Stock. All of the share numbers, share prices,
exercise prices, and all other similar items contained in this Prospectus have
been properly adjusted, on a retroactive basis, to reflect the foregoing.
From September 1998 through June 1999, the Company sold 461.8 units at
$10,000 each, for an aggregate of $4,618,000. Each unit consisted of a $10,000
principal amount 12% Senior Note, 2,000 1999-A Warrants, and 1,000 shares of
Series B Equity Participating Preferred Stock. The offering was sold to 222
accredited investors, and did not involve any general advertising or
solicitation, and was therefore exempt from registration under Rule 506 of
Regulation D promulgated under the Act. The Company paid compensation to
Harmonic Research, Inc., a broker-dealer, in connection with the 46 units sold
by such broker-dealer. In this regard, the Company paid to such broker-dealer
cash compensation of $46,000 as well as 43,400 shares of Common Stock and 9,400
1999-A Warrants. The shares of Common Stock issued to such broker-dealer are
restricted securities as such term is defined under Rule 144 promulgated under
the Act. In April 2000, the Company agreed to register for resale under the Act
18,400 shares of the Common Stock issued to Harmonic Research, Inc. Pursuant to
the private placement offering, the Company had issued 466,800 shares of Series
B Preferred Stock. The Series B Preferred Stock was convertible into 4 shares of
Common Stock in the event of a reverse stock split of the Common Stock. As a
result of the 1-for-10 reverse stock split which became effective on June 7,
1999, all of the shares of Series B Preferred Stock were exchanged for 1,867,200
shares of Common Stock, and as of the date hereof, there are no issued and
outstanding shares of Series B Preferred Stock. The shares of Common Stock
issued to the holders of the Series B Preferred Stock are restricted securities
as defined under Rule 144 promulgated under the Act, and can not be sold or
transferred without registration under the Act or pursuant to an applicable
exemption therefrom. The Company has registered for resale under the Act the
shares of Common Stock underlying the 1999-A Warrants.
In June and July 1999, the Company issued options to purchase an
aggregate of 470,000 shares of Common Stock to its executive officers and an
aggregate of 70,000 shares of Common Stock to its directors who were not
executive officers. See "Management -- Director Compensation and Stock Options"
and "Executive Stock Options."
48
<PAGE>
In June 1999, the Company issued options to purchase an aggregate of
12,000 shares of Common Stock to six employees. The options are fully vested and
may be exercised at any time for five years following vesting at $2.00 per share
of Common Stock.
During August 1999, the Company's Board of Directors authorized
issuance of a total of 377,800 shares of Common Stock to various employees and
consultants at $2.00 per share for services rendered or to be rendered in fiscal
year 2000, in lieu of cash compensation. Of such shares, 3,000 constitute
restricted securities as such term is defined under the Act, and the remaining
shares are to be registered under the Act. Of the 377,800 total shares, 278,000
shares were issued during the quarter ended September 30, 1999 and an
additional 66,263 shares were issued during the quarter ended December 31, 1999.
During the quarter ended September 30, 1999, an aggregate of 136,000
1999-A Warrants were exercised at $.50 per warrant, generating gross proceeds of
$68,000. Such shares of Common Stock were issued pursuant to the exemption from
registration set forth in Section 4(2) of the Act.
During the quarter ended September 30, 1999, the Company issued 15,500
shares of Common Stock upon the conversion of 15,500 shares of Series A
Preferred Stock and issued 9,337 shares of Common Stock upon the conversion of
$93,370 of cumulative dividends accrued and unpaid on the aforesaid shares of
Preferred Stock. Such shares of Common Stock were issued pursuant to the
exemption from registration set forth in Section 3(a)(9) of the Act.
In August 1999, the Company issued to an executive officer fully vested
options to acquire up to 20,000 shares of Common Stock at $2.00 per share. The
options are exercisable at any time within five years following issuance. The
Company issued the options pursuant to the exemption from registration set forth
in Section 4(2) of the Act. The Company has registered for resale under the Act
the Common Stock underlying the options.
In July 1999, the Company extended the expiration date until June 30,
2001 of options to acquire Common Stock held by certain Directors, officers or
employees. All of such options would have expired in the first two calendar
quarters of the year 2000 or the first calendar quarter of year 2001.
In October 1999, the Company authorized a temporary reduction in the
exercise price of 11,740 purchase rights for shares of Common Stock from $10.00
per share to $2.00 per share through January 31, 2000 (further extended to June
1, 2000 by the Company in January 2000). At that time the price shall revert
back to $10.00 per share.
In October 1999, the Company authorized a temporary reduction until
January 31, 2000 in the exercise price of 168,600 Common Stock purchase warrants
from the exercise prices listed below to $2.00 per share of Common Stock, as
follows: 67,300 1995 Warrants from $5.00 to $2.00; 86,800 1996 Warrants from
$5.00 to $2.00; 4,000 1996-B Warrants from $3.00 to $2.00; 1,500 1997 Warrants
from $4.00 to 2.00; 4,000 1998-A Warrants from $4.00 to $2.00; and 5,000 1998-B
Warrants from $4.00 to $2.00. In January 2000, the Company further extended such
temporary reductions until June 1, 2000 and in May 2000, the Company further
extended such temporary reductions until June 30, 2000.
During November 1999, the Company issued an aggregate of 150,000 shares
of Common Stock to consultants for services rendered or to be rendered to the
Company. All of such shares were registered under the Act.
During the quarter ended December 31, 1999, an aggregate of 627,700
1999-A Warrants were exercised at $.50 per warrant, generating gross proceeds
of $313,850. Such shares of Common Stock were issued pursuant to the exemption
from registration set forth in Section 4(2) of the Act.
During December 1999, the holder of 10,000 GEM Warrants exercised such
Warrants for 10,000 shares of Common Stock at $2.00 per share. Such shares were
issued pursuant to Regulation S promulgated under the Act.
During December 1999, an aggregate of 100,000 Consultant Warrants were
exercised at $2.00 per share. Such shares were registered for resale by the
holder thereof under the Act.
<PAGE>
From January 1, 2000 through March 31, 2000, the following occurred: (1)
the holder of Consultant Warrants exercised warrants at $2.50 per share for
34,000 shares of Common Stock; (ii) the holder of options exercised such options
at $1.50 per share for 10,000 shares of Common Stock and $2.50 per share for
6,500 shares of Common Stock; (iii) the holders of the 1999-A Warrants exercised
such warrants at $.50 per share for 146,900 shares of Common Stock; (iv) the
holders of the 1999-B Warrants exercised such warrants at $2.00 per share for
117,750 shares of Common Stock; and (v) the holders of the Senior Notes
converted an aggregate of $525,000 principal amount thereof at the rate of $2.50
per share for a total of 210,000 shares of Common Stock. The Company has
registered under the Act all of such shares of Common Stock for resale by the
holder thereof.
In February, March and April 2000, the Company sold 1,300,000 shares of
Common Stock at $2.00 per share pursuant to a private placement under Rule 506
promulgated under the Act. The Company has registered under the Act all of such
shares of Common Stock for resale by the holders thereof.
In July 2000, the Company received and accepted subscription agreements
with five investors to sell to such investors an aggregate of 2,200,000 shares
of restricted Common Stock. The purchase price for the stock is $1.50 per share
or an aggregate of $3,300,000. In July 2000, the purchase price was reduced to
$1.00 per share or an aggregate of $2,200,000. Pursuant to the agreements, full
payment for the shares by the investors is to be made to the Company on or
before August 31, 2000. To date, the Company has not received any of the
purchase price. The shares of Common Stock were offered and sold by the Company
pursuant to the exemptions from registration set forth in Regulation D and
Regulation S promulgated under the Act. All of the investors in the Common Stock
qualify as accredited investors as such term is defined in Rule 501 promulgated
under the Act. Pursuant to this Prospectus, the Company has registered all of
such shares of Common Stock for resale under the Act.
In June 2000, the Company reduced the exercise price of all of the
outstanding Common Stock purchase warrants (other than the 1999-A Warrants) to
$1.50 per share through July 31, 2000. In July 2000, the Company authorized the
Chairman of the Company to extend such date for up to sixty additional days or
until September 30, 2000. In July 2000, the exercise price of all of the Common
Stock purchase warrants (other than the 1999-A Warrants) was reduced to $1.00
through July 31, 2000 (subject to such sixty day extension).
49
<PAGE>
Consultant Warrants
Pursuant to a Financial Public Relations Agreement between the Company
and I.W. Miller Group, Inc. ("Miller"), the Company retained Miller as its
public relations consultant effective August 1, 1999. As part of the agreement,
the Company issued to Miller fully vested warrants to acquire up to 100,000
shares, 50,000 of which are exercisable at $2.00 per share and 50,000 of which
are exercisable at $3.00 per share. In October 1999, the exercise price of the
warrants exercisable at $3.00 per share was temporarily reduced to $2.00 through
January 30, 2000. The warrants are exercisable at any time for two years
following issuance. The warrants were issued to Miller pursuant to Rule 506
under the Act, and the shares of Common Stock underlying the warrants will be
issued to Miller pursuant to such exemption. During December 1999, Miller
exercised all of his Warrants at $2.00 per share.
The Company entered into a consulting agreement with Harmonic Research,
Inc. ("Harmonic") pursuant to which the Company issued to Harmonic fully vested
warrants to acquire up to 150,000 shares of Common Stock at $2.50 per share. The
warrants are exercisable at any time for two years following issuance. The
warrants were issued to Harmonic pursuant to Rule 506 under the Act, and the
shares of Common Stock underlying the warrants will be issued to Harmonic
pursuant to such exemption. Pursuant to the consulting agreement, the Company
retained Harmonic as a consultant for a three month period ending December 1,
1999, and agreed to pay Harmonic a fee of $5,000 per month. During February
2000, Harmonic exercised warrants for 34,000 shares at $2.50 per share. In April
2000, the Company permanently reduced the exercise price of the remaining
warrants to $1.00 per share.
The Company has at its expense registered for resale under the Act all
of the Common Stock underlying the Consultant Warrants.
Management Options
As of March 31, 2000, the Company had issued to its directors,
executive officers, consultants, and employees, options to acquire up to 15,000
shares of Common Stock at $5.00 per share, options to acquire up to 81,500
shares of Common Stock at $4.50 per share, options to acquire up to 110,000
shares of Common Stock at $2.50 per share, options to acquire up to 656,167
shares of Common Stock at $2.00 per share, options to acquire up to 117,100
shares of Common Stock at $1.50 per share, and options to acquire up to 5,000
shares of Common Stock at $.50 per share. See "Management--Executive Stock
Options", and "Management - Director Compensation and Stock Options." The
Company has also issued purchase rights to acquire up to 11,740 shares of Common
Stock at $10.00 per share. In October 1999, the exercise price of the purchase
rights was temporarily reduced to $2.00 per share through January 30, 2000 and
such date was subsequently extended until June 30, 2000. In June 2000, the
exercise price of the purchase rights was reduced to $1.50 through July 31, 2000
and in July 2000, the Company further reduced the exercise price to $1.00 and
authorized the Chairman to extend the July 31, 2000 expiration date for up to
sixty days. In connection with the Management Options, the Company has, at its
cost and expense, filed a registration statement under the Act covering the
resale of all the Common Stock underlying the options.
50
<PAGE>
Common Stock
The holder of each share of Common Stock is entitled to one vote on all
matters submitted to a vote of the shareholders of the Company, including the
election of directors. There is no cumulative voting for directors.
The holders of Common Stock are entitled to receive such dividends as
the Board of Directors may from time to time declare out of funds legally
available for payment of dividends. No dividend may be paid on the Common Stock
until all accumulated and unpaid dividends on the Series A Preferred Stock have
been paid.
Upon any liquidation, dissolution or winding up of the Company, holders
of shares of Common Stock are entitled to receive pro rata all of the assets of
the Company available for distribution, subject to the liquidation preference of
the Series A Preferred Stock of $10.00 per share and any unpaid and accumulated
dividends on the Series A Preferred Stock. The holders of the Common Stock do
not have any preemptive rights to subscribe for or purchase shares, obligations,
warrants, or other securities of the Company.
Series A Convertible Preferred Stock
The holders of shares of Series A Preferred Stock have the number of
votes per share equal to the number of shares of Common Stock into which each
such share is convertible (i.e., 1 share of Series A Preferred Stock equals 1
vote). The shares of Preferred Stock are entitled to vote on all matters
submitted to the vote of the shareholders of the Company, including the election
of directors.
The holders of Series A Preferred Stock are entitled to an annual
cumulative cash dividend of $1.50 per annum, payable when, as and if declared by
the Board of Directors. The record dates for payment of dividends on the Series
A Preferred Stock are February 1 and August 1 of each year. Any and all
accumulated and unpaid cash dividends on the Series A Preferred Stock must be
declared and paid prior to the declaration and payment of any dividends on the
Common Stock. Any unpaid and accumulated dividends will not bear interest. As of
March 31, 2000 the accumulated and unpaid dividends on the Series A Preferred
Stock were $3,991,449.
Each share of Series A Preferred Stock is convertible at any time into
1 share of fully issued and non-assessable Common Stock. Accrued and unpaid
dividends earned on shares of Series A Preferred Stock being converted into
Common Stock are also convertible into Common Stock at the rate $10.00 per share
of Common Stock at the time of conversion and whether or not such dividends have
then been declared by the Company. As of March 31, 2000, a total of 515,123
shares of Series A Preferred Stock have been converted into Common Stock and
accrued and unpaid dividends thereon have been converted into 2,002,697 shares
of Common Stock. The conversion rate of the Series A Preferred Stock (and any
accrued and unpaid dividends thereon) will be equitably adjusted for stock
splits, stock combinations, recapitalizations, and in connection with certain
other issuances of Common Stock by the Company. Upon any liquidation,
dissolution, or winding-up of the Company, the holders of Series A Preferred
Stock are entitled to receive a distribution in preference to the Common Stock
in the amount of $10.00 per share plus any accumulated and unpaid dividends.
The Company has the right, at any time, to redeem all or any part of
the issued and outstanding Series A Preferred Stock for the sum of $11.00 per
share plus any and all unpaid and accumulated dividends thereon. Upon notice by
the Company of such call, the holders of the Series A Preferred Stock so called
will have the opportunity to convert their shares of Series A Preferred Stock
and any unpaid and accumulated dividends thereon into shares of Common Stock.
The $11.00 per share figure was the redemption price approved by the Directors
and shareholders of the Company at the time the Series A Preferred Stock was
created and first issued. The Company currently has no plans to redeem the
Preferred Stock.
The Company paid a special stock dividend consisting of one-third of a
share of Common Stock for each share of Series A Preferred Stock issued and
outstanding on August 1, 1995. The stock dividend consisted of an aggregate of
190,860 shares of Common Stock.
51
<PAGE>
12% Senior Notes
The principal amount of each 12% Senior Note which is not voluntarily
converted shall be payable on December 31, 2001, at which time any unpaid and
accrued interest shall also become due. Interest shall accrue at the rate of 12%
per annum from and after the date of issuance and shall be payable quarterly in
arrears on December 31, March 31, June 30, and September 30 of each year until
December 31, 2001. The Senior Notes are senior to all existing equity securities
of the Company, including the Series A Preferred Stock.
During October 1999, the Company's Board of Directors authorized
voluntary conversion of all or any part of the 12% Senior Notes into shares of
Common Stock at the rate of $2.50 per share, at any time until the maturity date
of December 31, 2001. If all of the $4,618,000 principal amount of the Notes are
converted, the Company would issue 1,847,200 shares of Common Stock. The Company
has registered for resale under the Act the shares of Common Stock into which
the Senior Notes are convertible. Through March 31, 2000, an aggregate principal
amount of $525,000 of the Senior Notes have been converted into 210,000 shares
of Common Stock.
The indebtedness evidenced in the Senior Note is subordinated to the
prior payment when due of the principal of, premium, if any, and interest on
all "Senior Indebtedness", as defined herein, of the Company as follows: Upon
any distribution of its assets in a liquidation or dissolution of the Company,
or in bankruptcy, reorganization, insolvency, receivership or similar
proceedings relating to the Company, the Lender shall not be entitled to receive
payment until the holders of Senior Indebtedness are paid in full. Until a
payment default occurs with respect to any Senior Indebtedness, all payments of
principal and interest due to Lender under the Senior Note shall be made in
accordance with this Senior Note. Upon the occurrence of any payment default
with respect to any Senior Indebtedness then, upon written notice thereof to the
Company and Lender by any holder of such Senior Indebtedness or its
representative, no payments of principal or interest on the Senior Note shall be
made by the Company until such payment default has been cured to the
satisfaction of the holder of such Senior Indebtedness or waived by such holder,
provided, however, that if during the 180 day period following such default,
the holder of Senior Indebtedness has not accelerated its loan, commenced
foreclosure proceedings or otherwise undertaken to act on such default then
the Company shall be required to continue making payments under the Senior Note,
including any which had not been paid during such 180 day period. In the event
that any institutional lender to the Company at any time so requires, the Lender
shall execute, upon request of the Company, any intercreditor or subordination
agreement(s) with any such institutional lender on terms not materially more
adverse to the Lender then the subordination terms contained in this Senior
Note.
The term "Senior Indebtedness" shall mean (a) all direct or indirect,
contingent or certain indebtedness of any type, kind or nature (present or
future) created, incurred or assumed by the Company with respect to any future
bank or other financial institutional indebtedness of the Company, or (b) any
indebtedness created, incurred, or assumed, by the Company secured by a lien on
any assets of the Company.
Notwithstanding anything herein to the contrary, Senior Indebtedness
does not include (i) unsecured accounts payable to trade creditors of the
Company incurred in the ordinary course of business, (ii) any debt owed by the
Company, to any officer, director or stockholder of the Company, (iii) any
obligation of Borrower issued or contracted for as payment in consideration of
the purchase by the Company of the capital stock or substantially all of the
assets of another person or in consideration for the merger or consolidation
with respect to which the Company was a party, (iv) any operating lease
obligations of the Company, (v) any other indebtedness which by its terms is
subordinated to the Senior Note, or (vi) any "other indebtedness" which is
subordinated to all indebtedness to which the Senior Note is subordinated in
substantially like terms as the Senior Note; which such "other indebtedness"
shall be treated as equal with the indebtedness evidenced by the Senior Note.
52
<PAGE>
Series B Equity Participating Preferred Stock
Pursuant to the private placement offering conducted by the Company
from September 1998 through June 1999, the Company had issued 466,800 shares of
Series B Preferred Stock. The Series B Preferred Stock was convertible into 4
shares of Common Stock in the event of a reverse stock split of the Common
Stock. As a result of the 1-for-10 reverse stock split which became effective on
June 7, 1999, all of the shares of Series B Preferred Stock were exchanged for
1,867,200 shares of Common Stock, and as of the date hereof, there are no issued
and outstanding shares of Series B Preferred Stock. The 1,867,200 shares of
Common Stock issued to the holders of the Series B Preferred Stock are
restricted securities as defined under Rule 144 promulgated under the Act, and
can not be sold or transferred without registration under the Act or pursuant to
an applicable exemption therefrom.
Convertible Securities and GEM Warrants
During June 1997, the Company issued an aggregate of $500,000 of
Convertible Securities pursuant to an agreement with Gem Advisors Inc. ("GEM")
which provided GEM with the exclusive right to place the Convertible Securities
with qualified purchasers. Through December 31, 1997, the holders of all
$500,000 of Convertible Securities converted their securities into 191,574
shares of Common Stock at an average price of $2.60 per share. The Convertible
Securities were issued by the Company pursuant to Regulation S promulgated under
the Act.
Affiliates and/or consultants to GEM received non-redeemable warrants
to purchase up to 200,000 shares of the Company's Common Stock at a price of
$2.00 per share at any time prior to June 23, 2002 ("GEM Warrants"). These
warrants have been issued by the Company pursuant to Regulation S. Through March
31, 2000, 100,000 GEM Warrants had been exercised, leaving a balance of 100,000
GEM Warrants.
53
<PAGE>
1999-A Common Stock Purchase Warrants
Each 1999-A Warrant entitles its holder to immediately purchase one
share of Common Stock. The exercise price is $1.00 per share, except that
through January 31, 2000, the exercise price has been reduced to $.50 per share.
The 1999-A Warrants are exercisable at any time on or prior to December 31,
2001, or such later date as may be determined by the Company. As of March 31,
2000, an aggregate of 15,000 1999-A Warrants remain outstanding.
The Company has, at its expense, registered for resale the Common Stock
underlying the 1999-A Warrants. The Company will also seek to have the resale of
the Common Stock by non-affiliates of the Company exempted from registration in
applicable states.
The 1999-A Warrants have been issued pursuant to a warrant agreement
(the "1999-A Warrant Agreement") by and between the Company and American Stock
Transfer & Trust Company, the warrant agent, and will be evidenced by warrant
certificates.
The exercise price of the 1999-A Warrants and the number of shares of
Common Stock issuable upon exercise of the 1999-A Warrants are subject to
adjustment in certain circumstances, including a stock split of, stock dividend
on, or a subdivision, combination or recapitalization of the Common Stock. Upon
the merger, consolidation, sale of substantially all of the assets of the
Company, or other similar transaction, the Warrant holders shall, at the option
of the Company, be required to exercise the Warrants immediately prior to the
closing of the transaction, or such Warrants shall automatically expire. Upon
such exercise, the Warrant holders shall participate on the same basis as the
holders of Common Stock in connection with the transaction.
The 1999-A Warrants do not confer upon the holder any voting or any
other rights of a shareholder of the Company. Upon notice to the 1999-A Warrant
holders, the Company has the right, at any time and from time to time, to reduce
the exercise price or to extend the expiration date of the 1999-A Warrants.
54
<PAGE>
1999-B Common Stock Purchase Warrants
Each 1999-B Warrant entitles its holder to immediately purchase one
share of Common Stock. The exercise price is $2.00 per share. The 1999-B
Warrants are exercisable at any time on or prior to March 31, 2000, or such
later date as may be determined by the Company. As of March 31, 2000, 3,452,250
1999-B Warrants remain outstanding. In January 2000, the Company extended the
expiration date of the 1999-B Warrants until June 1, 2000; provided, however,
that if a holder of the 1999-B Warrants shall have exercised at least one-half
of such holder's 1999-B Warrants on or prior to June 1, 2000, the expiration
date for such holder's remaining 1999-B Warrants shall be November 1, 2000. In
May 2000, the June 1, 2000 expiration date referred to above was extended until
June 30, 2000. In June 2000, the exercise price of the 1999-B Warrants was
temporarily reduced to $1.50 and the expiration date of June 30, 2000 was
extended to July 31, 2000. In July 2000, the expiration date of November 1, 2000
referred to above was extended until March 31, 2001. In July 2000, the exercise
price was reduced to $1.00 through July 31, 2000 (subject to extension for up to
sixty days).
The Company has, at its expense, registered for resale of the Common
Stock underlying the 1999-B Warrants. The Company will also seek to have the
resale the Common Stock by non-affiliates of the Company exempted from
registration in applicable states.
The 1999-B Warrants have been issued pursuant to a warrant agreement
(the "1999-B Warrant Agreement") by and between the Company and American Stock
Transfer & Trust Company, the warrant agent, and will be evidenced by warrant
certificates.
The exercise price of the 1999-B Warrants and the number of shares of
Common Stock issuable upon exercise of the 1999-B Warrants are subject to
adjustment in certain circumstances, including a stock split of, stock dividend
on, or a subdivision, combination or recapitalization of the Common Stock. Upon
the merger, consolidation, sale of substantially all of the assets of the
Company, or other similar transaction, the Warrant holders shall, at the option
of the Company, be required to exercise the Warrants immediately prior to the
closing of the transaction, or such Warrants shall automatically expire. Upon
such exercise, the Warrant holders shall participate on the same basis as the
holders of Common Stock in connection with the transaction.
The 1999-B Warrants do not confer upon the holder any voting or any
other rights of a shareholder of the Company. Upon notice to the 1999-B Warrant
holders, the Company has the right, at any time and from time to time, to reduce
the exercise price or to extend the expiration date of the 1999-B Warrants.
55
<PAGE>
1998-B Common Stock Purchase Warrants
Each 1998-B Warrant entitles its holder to immediately purchase one
share of Common Stock. The exercise price is $4.00 per share, subject to
reduction at any time by the Company. In January 2000, the exercise price was
temporarily reduced to $2.00 through June 1, 2000 and in May 2000 the expiration
date was extended until June 30, 2000. In June 2000, the exercise price was
reduced to $1.50 through July 31, 2000, and in July 2000, the Company further
reduced the exercise price to $1.00 and authorized the Chairman to extend the
July 31, 2000 expiration date for up to sixty days. The 1998-B Warrants are
exercisable at any time prior to August 17, 2003, or such later date as may be
determined by the Company.
The 1998-B Warrants have been issued pursuant to a warrant agreement
(the "1998-B Warrant Agreement") dated as of July 1, 1998 by and between the
Company and American Stock Transfer & Trust Company, the transfer agent. The
Company issued 139,000 1998-B Warrants to the Selling Shareholders pursuant to
the 1998-B Warrant Agreement in a transaction exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Act"), and
applicable state securities laws. As of March 31, 2000, 5,000 1998-B
Warrants remain outstanding.
The Company has at its expense, registered for resale the Common Stock
underlying the 1998-B Warrants under the Act, and exempted from registration
such Common Stock for resale by non-affiliates of the Company, in those states
in which the holders of the 1998-B Warrants are located.
The exercise price of the 1998-B Warrants and the number of shares of
Common Stock issuable upon exercise of the 1998-B Warrants are subject to
adjustment in certain circumstances, including a stock split of, stock dividend
on, or a subdivision, combination or recapitalization of the Common Stock. Upon
the merger, consolidation, sale of substantially all of the assets of the
Company, or other similar transaction, the Warrant holders shall, at the option
of the Company, be required to exercise the Warrants immediately prior to the
closing of the transaction, or such Warrants shall automatically expire. Upon
such exercise, the Warrant holders shall participate on the same basis as the
holders of Common Stock in connection with the transaction.
The 1998-B Warrants do not confer upon the holder any voting or any
other rights of a shareholder of the Company. Upon notice to the 1998-B Warrant
holders, the Company has the right, at any time and from time to time, to reduce
the exercise price or to extend the expiration date of the 1998-B Warrants.
1998-A Common Stock Purchase Warrants
Each 1998-A Warrant entitles its holder to immediately purchase one
share of Common Stock. The exercise price is $4.00 per share, subject to
reduction at any time by the Company. In January 2000, the exercise price was
temporarily reduced to $2.00 through June 1, 2000 and in May 2000 the expiration
date was extended until June 30, 2000. In June 2000, the exercise price was
reduced to $1.50 through July 31, 2000, and in July 2000, the Company further
reduced the exercise price to $1.00 and authorized the Chairman to extend the
July 31, 2000 expiration date for up to sixty days. The 1998-A Warrants are
exercisable at any time prior to March 5, 2003 or such later date as may be
determined by the Company.
The 1998-A Warrants have been issued pursuant to a warrant agreement
(the "1998-A Warrant Agreement") dated as of January 28, 1998 by and between the
Company and American Stock Transfer & Trust Company, the warrant agent. The
Company issued 375,000 1998-A Warrants to the Selling Shareholders pursuant to
the 1998-A Warrant Agreement in a transaction exempt from the registration
requirements of the Act and applicable state securities laws. As of March 31,
2000, 4,000 1998-A Warrants remain outstanding.
The Company has, at its expense, registered for resale the Common Stock
underlying the 1998-A Warrants under the Act, and exempted from registration
such Common Stock for resale by non-affiliates of the Company in those states in
which the holders of the 1998-A Warrants are located.
The exercise price of the 1998-A Warrants and the number of shares of
Common Stock issuable upon exercise of the 1998-A Warrants are subject to
adjustment in certain circumstances, including a stock split of stock dividend
on, or a subdivision, combination or recapitalization of, the Common Stock. Upon
the merger, consolidation, sale of substantially all of the assets of the
Company, or other similar transaction, the Warrant holders shall, at the option
of the Company, be required to exercise the Warrants immediately prior to the
closing of the transaction, or such Warrants shall automatically expire. Upon
such exercise, the Warrant holders shall participate on the same basis as the
holders of Common Stock in connection with the transaction.
The 1998-A Warrants do not confer upon the holder any voting or any other
rights of a shareholder of the Company. Upon notice to the 1998-A Warrant
holders, the Company has the right, at any time and from time to time, to
reduce the exercise price or to extend the expiration date of the 1998-A
Warrants.
56
<PAGE>
1997 Common Stock Purchase Warrants
Each 1997 Warrant entitles its holder to immediately purchase one share
of Common Stock. The exercise price is $4.00 per share, subject to reduction at
any time by the Company. In January 2000, the exercise price was temporarily
reduced to $2.00 per share through June 1, 2000 and in May 2000 the expiration
date was extended until June 30, 2000. In June 2000, the exercise price was
reduced to $1.50 through July 31, 2000, and in July 2000, the Company further
reduced the exercise price to $1.00 and authorized the Chairman to extend the
July 31, 2000 expiration date for up to sixty days. The 1997 Warrants are
exercisable at any time prior to July 3, 2002, or such later date as may be
determined by the Company.
The 1997 Warrants have been issued pursuant to a warrant agreement (the
"1997 Warrant Agreement") dated as of April 8, 1997 by and between the Company
and American Stock Transfer & Trust Company, the warrant agent. The Company
issued 160,000 1997 Warrants to the Selling Shareholders pursuant to the 1997
Warrant Agreement in a transaction exempt from the registration requirements of
the Act and applicable state securities laws. As of March 31, 2000, 158,500
1997 Warrants have been exercised and 1,500 remain outstanding.
The Company has, at its expense, registered for resale the Common Stock
underlying the 1997 Warrants under the Act, and has exempted from registration
such Common Stock for resale by non-affiliates of the Company in those states in
which the holders of the 1997 Warrants are located.
The exercise price of the 1997 Warrants and the number of shares of
Common Stock issuable upon exercise of the 1997 Warrants are subject to
adjustment in certain circumstances, including a stock split of, stock dividend
on, or a subdivision, combination or recapitalization of the Common Stock. Upon
the merger, consolidation, sale of substantially all of the assets of the
Company, or other similar transaction, the Warrant holders shall, at the option
of the Company, be required to exercise the Warrants immediately prior to the
closing of the transaction, or such Warrants shall automatically expire. Upon
such exercise, the Warrant holders shall participate on the same basis as the
holders of Common Stock in connection with the transaction.
The 1997 Warrants do not confer upon the holder any voting or any other
rights of a shareholder of the Company. Upon notice to the 1997 Warrant holders,
the Company has the right, at any time and from time to time, to reduce the
exercise price or to extend the expiration date of the 1997 Warrants.
1996-B Common Stock Purchase Warrants
Each 1996-B Warrant entitles its holder to immediately purchase one
share of Common Stock. The exercise price is $3.00 per share, subject to
reduction at any time by the Company. In January 2000, the exercise price was
temporarily reduced to $2.00 per share through June 1, 2000 and in May 2000 the
expiration date was extended until June 30, 2000. In June 2000, the exercise
price was reduced to $1.50 through July 31, 2000, and in July 2000, the Company
further reduced the exercise price to $1.00 and authorized the Chairman to
extend the July 31, 2000 expiration date for up to sixty days. The 1996-B
Warrants are exercisable at any time prior to February 28, 2002 or such later
date as may be determined by the Company.
The 1996-B Warrants have been issued pursuant to a warrant agreement
dated as of February 28, 1997 (the "1996-B Warrant Agreement") dated as of
December 27, 1996 by and between the Company and American Stock Transfer & Trust
Company, the warrant agent. The Company issued 37,400 1996-B Warrants to the
Selling Shareholders pursuant to the 1996-B Warrant Agreement in a transaction
exempt from the registration requirements of the Act and applicable securities
laws. As of March 31, 2000, 33,400 1996-B Warrants were exercised and 4,000
remain outstanding.
The Company has, at its expense, registered for resale the Common Stock
underlying the 1996-B Warrants under the Act, and has exempted from registration
such Common Stock for resale by non-affiliates of the Company in those states in
which the holders of the 1996-B Warrants are located.
The exercise price of the 1996-B Warrants and the number of shares of
Common Stock issuable upon exercise of the 1996-B Warrants are subject to
adjustment in certain circumstances, including a stock split of, stock dividend
on, or a subdivision, combination or recapitalization of the Common Stock. Upon
the merger, consolidation, sale of substantially all of the assets of the
Company, or other similar transaction, the Warrant holders shall, at the option
of the Company, be required to exercise the Warrants immediately prior to the
closing of the transaction, or such Warrants shall automatically expire. Upon
such exercise, the Warrant holders shall participate on the same basis as the
holders of Common Stock in connection with the transaction.
The 1996-B Warrants do not confer upon the holder any voting or any
other rights of a shareholder of the Company. Upon notice to the 1996-B Warrant
holders, the Company has the right, at any time and from time to time, to reduce
the exercise price or to extend the expiration date of the 1996-B Warrants.
57
<PAGE>
1996 Common Stock Purchase Warrants
Each 1996 Warrant entitles its holder to immediately purchase one share
of Common Stock. The exercise price is $5.00, or such lower price as may be
determined by the Company from time to time. In January 2000, the exercise price
was temporarily reduced to $2.00 per share through June 1, 2000 and in May 2000
the expiration date was extended until June 30, 2000. In June 2000, the exercise
price was reduced to $1.50 through July 31, 2000, and in July 2000, the Company
further reduced the exercise price to $1.00 and authorized the Chairman to
extend the July 31, 2000 expiration date for up to sixty days. The 1996 Warrants
are exercisable at any time through May 31, 2001, or such later date as may be
determined by the Company.
The 1996 Warrants have been issued pursuant to a 1996 Warrant Agreement
dated as of May 1, 1996, by and between the Company and American Stock Transfer
& Trust Company, the warrant agent. The Company issued 520,000 1996 Warrants to
the Selling Shareholders pursuant to the 1996 Warrant Agreement in a transaction
exempt from the registration requirements of the Act and applicable state
securities laws. As of March 31, 2000, 433,200 1996 Warrants were exercised
and 86,800 remain outstanding.
The Company has, at its expense, registered for resale the Common Stock
underlying the 1996 Warrants under the Act, and has exempted from registration
such Common Stock for resale by non-affiliates of the Company in those states in
which the holders of the 1996 Warrants are located.
The exercise price of the 1996 Warrants and the number of shares of
Common Stock issuable upon exercise of the 1996 Warrants are subject to
adjustment in certain circumstances, including a stock split of, stock dividend
on, or a subdivision, combination or recapitalization of the Common Stock. Upon
the merger, consolidation, sale of substantially all the assets of the Company,
or other similar transaction, the 1996 Warrant holders shall, at the option of
the Company, be required to exercise the 1996 Warrants immediately prior to the
closing of the transaction, or such 1996 Warrants shall automatically expire.
Upon such exercise, the 1996 Warrant holders shall participate on the same basis
as the holders of Common Stock in connection with the transaction.
The 1996 Warrants do not confer upon the holder any voting or any other
rights of a shareholder of the Company. Upon notice to the 1996 Warrant holders,
the Company has the right, at any time and from time to time, to reduce the
exercise price or to extend the 1996 Warrant Termination Date.
1995 Common Stock Purchase Warrants
Each 1995 Warrant entitles its holder to immediately purchase one share
of Common Stock. The exercise price is $5.00, or such lower exercise price as
may be determined by the Company from time to time. In January 2000, the
exercise price was temporarily reduced to $2.00 per share through June 1, 2000
and in May 2000 the expiration date was extended until June 30, 2000. In June
2000, the exercise price was reduced to $1.50 through July 31, 2000, and in July
2000, the Company further reduced the exercise price to $1.00 and authorized the
Chairman to extend the July 31, 2000 expiration date for up to sixty days. The
1995 Warrants are exercisable at any time through January 31, 2001, or such
later date as may be determined by the Company.
The 1995 Warrants have been issued pursuant to a 1995 Warrant Agreement
dated as of June 21, 1995, by and between the Company and American Stock
Transfer & Trust Company, the warrant agent. The Company issued 510,000 1995
Warrants to the Selling Shareholders pursuant to the 1995 Warrant Agreement in a
transaction exempt from the registration requirements of the Act and applicable
state securities laws. As of March 31, 2000, 442,700 1995 Warrants were
exercised and 67,300 remain outstanding.
The Company has registered for resale the Common Stock underlying the
1995 Warrants under the Act, and has registered or exempted from registration
such Common Stock for resale by non-affiliates of the Company in those states in
which the holders of the 1995 Warrants are located.
The exercise price of the 1995 Warrants and the number of shares of
Common Stock issuable upon exercise of the 1995 Warrants are subject to
adjustment in certain circumstances, including a stock split of, stock dividend
on, or a subdivision, combination or recapitalization of the Common Stock. Upon
the merger, consolidation, sale of substantially all the assets of the Company,
or other similar transaction, the 1995 Warrant holders shall, at the option of
the Company, be required to exercise the 1995 Warrants immediately prior to the
closing of the transaction, or such Warrants shall automatically expire. Upon
such exercise, the 1995 Warrant holders shall participate on the same basis as
the holders of Common Stock in connection with the transaction.
The 1995 Warrants do not confer upon the holder any voting or any other
rights of a shareholder of the Company. Upon notice to the 1995 Warrant holders,
the Company has the right, at any time and from time to time, to reduce the
exercise price or to extend the 1995 Warrant Termination Date.
58
<PAGE>
Shares Eligible for Future Sale
Of the 13,083,732 shares of Common Stock issued and outstanding on
March 31, 2000, 11,181,132 are freely transferable without registration under
the Act (other than shares held by "affiliates" of the Company), and the
remaining 1,902,600 are "restricted securities". As of March 31, 2000, there
were 595,027 shares of Preferred Stock issued and outstanding, all of which are
freely transferable without further registration under the Act (other than
shares held by "affiliates" of the Company). The 595,027 shares of Preferred
Stock issued and outstanding as of March 31, 2000 are convertible into 595,027
shares of Common Stock all of which would be fully transferrable without further
registration under the Act (other than shares held by "affiliates" of the
Company).
As set forth in the prior paragraph, there were 1,902,600 shares of
Common Stock which are "restricted securities" and cannot be resold without
registration. All of such shares would become eligible for sale during calendar
year 2000 without further registration under the Act pursuant to Rule 144
promulgated thereunder.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated), including any affiliate of the
Company, who beneficially owns "restricted securities" for a period of at least
one year is entitled to sell within any three-month period, shares equal in
number to the greater of (i) 1% of the then outstanding shares of the same class
of shares, or (ii) the average weekly trading volume of the same class of shares
during the four calendar weeks preceding the filing of the required notice of
sale with the Securities and Exchange Commission. The seller must also comply
with the notice and manner of sale requirements of Rule 144, and there must be
current public information available about the Company. In addition, any person
(or persons whose shares must be aggregated) who is not, at the time of sale,
nor during the preceding three months, an affiliate of the Company, and who has
beneficially owned restricted shares for at least two years, can sell such
shares under Rule 144 without regard to the notice, manner of sale, public
information or the volume limitations described above.
Limitation of Liability; Indemnification
As permitted by the Pennsylvania Business Corporation Law of 1988
("BCL"), the Company's By-laws provide that Directors of the Company will not be
personally liable, as such, for monetary damages for any action taken unless the
Director has breached or failed to perform the duties of a Director under the
BCL and the breach or failure to perform constitutes self-dealing, willful
59
<PAGE>
misconduct or recklessness. This limitation of personal liability does not apply
to any responsibility or liability pursuant to any criminal statute, or any
liability for the payment of taxes pursuant to Federal, State or local law. The
By-laws also include provisions for indemnification of the Company's Directors
and officers to the fullest extent permitted by the BCL. Insofar as
indemnification for liabilities arising under the Act may be permitted to
Directors, officers and controlling persons of the Company pursuant to the
foregoing provisions, or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock, Series A
Preferred Stock, 1999-B Warrants, 1999-A Warrants, 1998-B Warrants, 1998-A
Warrants, 1997 Warrants, 1996-B Warrants, 1996 Warrants and 1995 Warrants is
American Stock Transfer & Trust Company, 40 Wall Street, New York, New York
10005.
PLAN OF DISTRIBUTION
The Common Stock is being registered to permit public secondary trading
of the Common Stock by the Selling Shareholders from time to time after the date
of this Prospectus. The Company has agreed to bear all the expenses (other than
selling commissions) in connection with the registration and sale of the Common
Stock covered by this Prospectus.
The Common Stock offered by the Selling Shareholders pursuant to this
Prospectus may be sold from time to time by the Selling Shareholders or by
pledgees, donees, transferees or other successors in interest. The sale of the
Common Stock offered hereby by the Selling Shareholders may be effected in one
or more transactions that may take place on the over-the-counter market,
including ordinary brokers' transactions, privately negotiated transactions or
through sales to one or more dealers for resale of such securities as
principals. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the Selling Shareholders. The Registration Statement
of which this Prospectus is a part must be current at any time during which a
Selling Shareholder sells shares of Common Stock.
Selling Shareholders may also offer the shares covered by this
Prospectus under other registration statements or pursuant to exemptions from
the registration requirements of the Act, including sales which meet the
requirements of Rule 144 under the Act. Selling Shareholders should seek advice
from their own counsel with respect to the legal requirements of such sales.
This Prospectus may be supplemented or amended from time to time to
reflect its use relating to the Common Stock for resales by Selling Shareholders
not named in this Prospectus by such who obtain the right to sell the shares of
Common Stock hereunder.
The Company will not directly receive any of the proceeds from the sale
of the Common Stock by the Selling Shareholders. The Selling Shareholders will
receive all of the net proceeds from the sale of the Common Stock and will pay
all selling commissions, if any, applicable to the sale of the Common Stock. The
Company is responsible for all other expenses incident to the offer and sale of
the Common Stock.
In order to comply with the securities laws of certain states,
if applicable, the Common Stock will be sold in such jurisdictions
only through registered or licensed brokers or dealers. In
60
<PAGE>
addition, in certain states, the Common Stock may not be sold unless it has been
registered or qualified for resale by the Selling Shareholder in the applicable
state or an exemption from the registration or qualification requirement is
available and complied with.
LEGAL MATTERS
The validity of the Common Stock has been passed upon for the Company
by Lurio & Associates, P.C., Philadelphia, Pennsylvania 19103.
EXPERTS
The consolidated financial statements of USA Technologies, Inc. at June
30, 1999 and 1998, and for each of the two years in the period ended June 30,
1999, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
(which contains an explanatory paragraph describing conditions that raise
substantial doubt about the Company's ability to continue as a going concern as
described in Note 2 to the consolidated financial statements) appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
61
<PAGE>
INDEX TO FINANCIAL STATEMENTS
USA TECHNOLOGIES, INC.
Report of Independent Auditors F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Shareholders' Equity F-4
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
<PAGE>
Report of Independent Auditors
To the Board of Directors and Shareholders
USA Technologies, Inc.
We have audited the accompanying consolidated balance sheets of USA
Technologies, Inc. as of June 30, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
two years in the period ended June 30, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of USA Technologies, Inc. at June 30, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended June 30, 1999, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming USA
Technologies, Inc. will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company's recurring losses from
operations from its inception and its accumulated deficit through June 30,
1999, raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note 2. The financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
might result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
September 14, 1999
F-1
<PAGE>
USA Technologies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30 March 31,
1999 1998 2000
(Unaudited)
-------------------------------------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,665,016 $ 324,824 $ 3,385,430
Accounts receivable, less allowance for uncollectible accounts
of $69,555 and $23,764 in 1999 and 1998, respectively and
$79,915 at March 31, 2000 361,463 222,743 192,635
Inventory 1,255,836 436,971 1,117,375
Subscriptions receivable 178,873 19,875 340,222
Prepaid expenses and deposits 42,746 20,515 615,112
----------------------------------------------
Total current assets 3,503,934 1,024,928 5,650,774
Property and equipment, net 143,670 151,906 361,861
Other assets 10,250 10,250 14,740
----------------------------------------------
Total assets $ 3,657,854 $ 1,187,084 $ 6,027,375
==============================================
Liabilities and shareholders' equity (deficit)
Current liabilities:
Accounts payable $ 917,141 $ 576,787 $ 758,018
Note payable - equipment 804,485 -- 83,689
Accrued expenses 498,548 430,643 729,523
Current obligations under capital leases 4,393 22,810 9,144
----------------------------------------------
Total current liabilities 2,224,567 1,030,240 1,580,374
Senior Note, net of unamortized discount 2,054,232 -- 2,466,640
Obligations under capital leases, less current portion 22,584 1,669 37,450
----------------------------------------------
Total liabilities 4,301,383 1,031,909 4,084,464
Shareholders' equity (deficit):
Preferred Stock, no par value:
Authorized shares - 1,800,000
Series A Convertible Preferred Authorized shares - 900,000
Issued and outstanding shares - 640,577 and 618,236 at
June 30, 1999 and 1998, respectively and 595,027 at March 31, 2000 -
unaudited (liquidation preference of $9,734,212 at June 30, 1999 and
$9,941,719 at March 31, 2000 - unaudited) 4,537,128 4,538,114 4,214,634
Common Stock, no par value:
Authorized shares - 62,000,000
Issued and outstanding shares - 6,191,097 and 4,016,384 at
June 30, 1999 and 1998, respectively and 13,083,732 at 14,277,763 11,223,213 23,398,919
March 31, 2000 (unaudited)
Subscriptions receivable (83,983) -- (31,446)
Accumulated deficit (19,374,437) (15,606,152) (25,639,196)
----------------------------------------------
Total shareholders' equity (deficit) (643,529) 155,175 1,942,911
----------------------------------------------
Total liabilities and shareholders' equity (deficit) $ 3,657,854 $ 1,187,084 $ 6,027,375
==============================================
</TABLE>
See accompanying notes.
F-2
<PAGE>
USA Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Year ended Nine months ended
June 30, March 31,
1999 1998 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Equipment Sales $ 3,442,197 $ 1,588,487 $ 931,797 $ 3,021,727
License and transaction fees 448,319 236,742 475,963 318,555
----------- ----------- ----------- -----------
Total revenues 3,890,516 1,825,229 1,407,760 3,340,282
Operating Expenses:
Cost of equipment sales 2,962,922 1,261,729 864,402 2,576,394
General and administrative 2,687,744 2,213,984 3,555,753 1,614,407
Compensation 1,553,189 1,909,682 1,664,299 1,025,154
Depreciation and amortization 91,773 116,255 46,736 82,012
----------- ----------- ----------- -----------
Total operating expenses 7,295,628 5,501,650 6,131,190 5,297,967
----------- ----------- ----------- -----------
(3,405,112) (3,676,421) (4,723,430) (1,957,685)
Other income (expense):
Interest income 8,347 18,225 49,471 5,229
Interest expense (135,505) (8,443) (1,245,332) (28,260)
Joint Venture activities (119,354) 98,358 (78,398) (158,064)
----------- ----------- ----------- -----------
Total other income (expense) (246,512) 108,140 (1,274,259) (181,095)
----------- ----------- ----------- -----------
Net loss (3,651,624) (3,568,281) (5,997,689) (2,138,780)
Cumulative preferred dividends and other
adjustments (1,002,453) (1,754,566) (930,078) (1,002,453)
----------- ----------- ----------- -----------
Loss applicable to common shares $(4,654,077) $(5,322,847) $(6,927,767) $(3,141,233)
=========== =========== =========== ===========
Loss per common share (basic and diluted) $ (1.07) $ (1.51) $ (0.76) $ (0.77)
=========== =========== =========== ===========
Weighted average number of common shares
outstanding (basic and diluted) 4,348,866 3,532,048 9,138,032 4,059,540
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
USA Technologies, Inc.
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Series A
Convertible
Preferred Common Accumulated
Stock Stock Deficit Total
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, June 30, 1997 $ 7,024,811 $ 4,355,334 $ (10,534,004) $ 846,141
Issuance of 20,500 shares of Common Stock in
exchange for consulting services -- 68,096 -- 68,096
Issuance of 950 shares of Common Stock to
employees as compensation -- 2,565 -- 2,565
Conversion of 392,969 shares of Convertible
Preferred Stock to 466,453 shares of
Common Stock (3,188,207) 3,188,207 -- --
Conversion of $1,388,772 of cumulative
preferred dividends into 167,455 shares of
Common Stock at $8.30 per share -- 1,388,772 (1,388,772) --
Conversion of $115,095 of cumulative
preferred dividends into 11,509 shares of
Common Stock at $10.00 per share -- 115,095 (115,095) --
Common Stock warrants exercised - 371,000 at
$1.50 per warrant -- 556,500 -- 556,500
Common Stock warrants exercised - 281,900 at
$2.00 per warrant, net of offering costs
-- 521,639 -- 521,639
Common Stock warrants exercised - 187,100 at
$2.50 per warrant -- 467,750 -- 467,750
Exercise of 7,000 Common Stock options -
at $.50 per share -- 3,500 -- 3,500
Exercise of 4.50 Common Stock purchase rights
- at $2.50 per share -- 1,125 -- 1,125
Cancellation of 436,500 shares of Common
Stock by the President of the Company -- -- -- --
Issuance of 150,000 shares (75 units) of
Convertible Preferred Stock at $5.00 per
share, in connection with 1997B Private
Placement, net of offering costs 701,510 -- -- 701,510
Reduction in exercise price below the fair
market value for 189,600 Common Stock
options -- 554,630 - 554,630
Net loss -- -- (3,568,281) (3,568,281)
------------------------------------------------------------------
Balance, June 30, 1998 $ 4,538,114 $ 11,223,213 $ (15,606,152) $ 155,175
</TABLE>
F-4
<PAGE>
USA Technologies, Inc.
Consolidated Statements of Shareholders' Equity (continued)
<TABLE>
<CAPTION>
Series A
Convertible
Preferred Common Subscriptions Accumulated
Stock Stock Receivable Deficit Total
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Issuance of 55,600 shares (27.8 units) of
Convertible Preferred Stock at $5.00 per
share, in connection with 1998B Private
Placement, net of offering costs $ 234,485 $ -- $ -- $ -- $ 234,485
Issuance of 9,200 warrants of Common Stock in
exchange for services -- 18,400 -- -- 18,400
Issuance of 80,400 shares of Common Stock in
exchange for services -- 150,820 -- -- 150,820
Issuance of 50 shares of Common Stock to an
employee as compensation -- 100 -- -- 100
Conversion of 3,326 shares of Convertible
Preferred Stock to 3,326 shares of
Common Stock (235,471) 235,471 -- -- --
Conversion of $116,661 of cumulative
preferred dividends into 11,666 shares of
Common Stock at $10.00 per share -- 116,661 -- (116,661) --
Common Stock warrants exercised - 134,000 at
$1.00 per warrant -- 134,000 -- -- 134,000
Exercise of 45,000 Common Stock options - at
$1.00 per share -- 45,000 -- -- 45,000
Exercise of 3,540 Common Stock purchase
rights - at $1.00 per share -- 3,540 -- -- 3,540
Issuance of 1,867,200 shares of Common
Stock from the conversion of 466,800
shares of Series B Equity Participating
Preferred Stock, in connection with the
1999 Senior Note Offering (Note 9) -- 524,485 -- -- 524,485
Issuance of 933,600 warrants in connection
with the 1999 Senior Note Offering -- 1,826,073 -- -- 1,826,073
Subscriptions receivable relating to the 1999
Senior Note Offering -- -- (83,983) -- (83,983)
Net loss -- -- -- (3,651,624) (3,651,624)
-------------------------------------------------------------------------------
Balance, June 30, 1999 4,537,128 14,277,763 (83,983) (19,374,437) (643,529)
</TABLE>
<PAGE>
USA Technologies, Inc.
Consolidated Statement of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Series A
Convertible
Preferred Common Subscriptions Accumulated
Stock Stock Receivable Deficit Total
------------ ------- ------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1999 $4,537,128 $14,277,763 $ (83,983) $(19,374,437) $ (643,529)
Issuance of 210,023 shares of
Common Stock to employees as
compensation -- 504,425 -- 504,425
Conversion of 45,550 shares of
Convertible Preferred Stock to
45,550 shares of Common Stock (322,494) 322,494 --
Conversion of $267,070 of cumulative
preferred dividends into 26,707
shares of Common Stock at $10.00
per share -- 267,070 -- (267,070) --
Issuance of 418,000 shares of Common
Stock in exchange for professional
and consulting services 836,000 -- -- 836,000
Exercise of 910,600 Common Stock
warrants at $.50 per share -- 455,300 -- -- 455,300
Exercise of 217,750 Common Stock
warrants at $2.00 per share -- 435,500 -- 435,500
Exercise of 34,000 Common Stock
Warrants at $2.50 per share -- 85,000 -- -- 85,000
Exercise of 10,000 Common Stock
Options at $1.50 per share -- 15,000 -- -- 15,000
Exercise of 6,500 Common Stock
Options at $2.50 per share -- 16,250 -- -- 16,250
Issuance of 150,000 Common Stock
warrants in exchange for professional
services -- 99,000 -- -- 99,000
Issuance of 210,000 shares of Common
Stock from the conversion of $525,000 of
the 12% Senior Notes 339,931 -- -- 339,931
Issuance of 3,560,000 shares of Common
Stock at $1.00 per share in connection
with the 1999-B Private Placement, net of
offering costs of $96,058 -- 3,463,942 -- -- 3,463,942
Issuance of 1,263,500 shares of Common
Stock at $2.00 per share in connection
with the 2000-A Private Placement, net of
offering costs of $220,902 -- 2,306,098 -- -- 2,306,098
Reduction of 20,000 shares of Common
Stock issued in connection with the
cancellation of $50,000 Senior Notes (5,618) (5,618)
Reduction of 10,000 warrants in connection
with the cancellation of $50,000
Senior Notes (19,559) (19,559)
Collection of subscriptions receivable 52,537 52,537
Net loss -- -- (5,997,689) (5,997,689)
----------------------------------------------------------------------------------------
Balance, March 31, 2000 $4,214,634 $23,398,919 $ (31,446) $(25,639,196) $ 1,942,911
========================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
USA Technologies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Year ended June 30 Nine months ended
March 31,
1999 1998 2000 1999
--------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net loss $(3,651,624) $(3,568,281) $(5,997,689) $(2,138,780)
Adjustments to reconcile net loss to net cash used in
operating activities:
Compensation charges incurred in connection
with the issuance of Common Stock and
Common Stock Purchase Warrants and
Repricing Purchase Warrants and repricing of
Common Stock options 169,320 625,291 848,969 37,100
Depreciation 91,773 116,255 752,339 --
Interest relating to Senior Note Offering 35,494 -- 68,741 82,012
Provision for allowance for uncollectible
accounts 45,791 10,441 10,360 --
Changes in operating assets and liabilities:
Accounts receivable (184,511) (204,224) 158,468 (526,321)
Inventory (832,685) (147,634) 38,215 (367,708)
Prepaid expenses, deposits, and other assets (22,231) 5,155 13,923 (11,946)
Accounts payable 340,354 200,499 (159,123) 1,701,139
Accrued expenses 67,905 383,901 230,975 (20,709)
--------------------------------------------------------
Net cash used in operating activities (3,940,414) (2,578,597) (4,054,822) (1,245,213)
Investing activities
Purchase of property and equipment (40,141) (723) (139,704) (8,984)
--------------------------------------------------------
Net cash used in investing activities (40,141) (723) (139,704) (8,984)
Financing activities
Proceeds/(repayment) of line of credit agreement 804,485 -- (720,796) --
Net proceeds from issuance of Senior Notes 4,106,440 -- 171,411 883,192
Net proceeds from issuance of Common Stock and
Exercise of Common Stock Purchase Warrants 182,540 1,530,639 6,422,691 193,775
Net proceeds from issuance of Convertible
Preferred Stock 254,360 761,510 -- 234,485
Net decrease in Subscriptions Receivable 48,999 --
Repayment of principal on capital lease obligations (27,078) (18,271) (7,365) (19,567)
--------------------------------------------------------
Net cash provided by financing activities 5,320,747 2,273,878 5,914,940 1,291,885
--------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,340,192 (305,442) 1,720,414 37,688
Cash and cash equivalents at beginning of year 324,824 630,266 1,665,016 324,824
--------------------------------------------------------
Cash and cash equivalents at end of year $ 1,665,016 $ 324,824 $ 3,385,430 $ 362,512
========================================================
Supplemental disclosures of cash flow information:
Conversion of Convertible Preferred Stock to
Common Stock $ 235,471 $ 3,188,207 $ 322,494 $ 99,007
========================================================
Conversion of Cumulative Preferred Dividends to
Common Stock $ 116,661 $ 1,503,867 $ 267,070 $ 62,549
========================================================
Conversion of Senior Notes to Common Stock $ -- $ -- $ 339,931 $ --
========================================================
Subscriptions receivable $ 262,856 $ 19,875 $ 340,222 $ --
========================================================
Cash paid during the year for interest $ 95,089 $ 18,777 $ 270,939 $ --
========================================================
Prepaid stock compensation -- -- $ 590,779 --
========================================================
Transfer of depreciation to cost of goods $ -- $ -- $ 22,005 $ --
========================================================
Non-cash addition to property and equipment $ -- $ -- $ 20,000 $ --
========================================================
Transfer of inventory to property and equipment $ 13,820 $ 88,981 $ 100,246 --
=======================================================
Capital lease obligations incurred $ 29,576 $ -- -- $ 29,242
=======================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements
1. Business
USA Technologies, Inc., a Pennsylvania corporation (the "Company"), was
incorporated on January 16, 1992. The Company is a provider and licensor of
unattended, credit card activated control systems for the copying, debit card
and personal computer industries. The Company's customers are principally
located in the United States and are comprised of hotels, retail locations,
university libraries, and public libraries. The Company generates its revenues
from the direct sale of equipment utilizing its control systems, from retaining
a percentage of the gross licensing fees generated by the control systems, and
from a monthly administrative service fee. The Company offers the Business
Express(R) principally to the hospitality industry. The Business Express(R)
combines the Company's business applications for computers, copiers and
facsimile machines into a business center unit.
2. Accounting Policies
Basis of Financial Statement Presentation
The consolidated financial statements of the Company have been prepared assuming
the Company will continue as a going concern, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
Accordingly, the consolidated financial statements do not include any
adjustments that might be necessary should the Company be unable to continue in
existence. The Company has incurred substantial losses of $3.7 million and $3.6
million during each of the fiscal years ending June 30, 1999 and 1998,
respectively, and cumulative losses from its inception through March 31, 2000
amounting to $22.6 million. Losses have continued through June 2000. The
Company's ability to meet its future obligations is dependent upon the success
of its products in the marketplace and its ability to raise capital until the
Company's products can generate sufficient operating revenues. These factors
raise doubt about the Company's ability to continue as a going concern.
Management believes that actions presently being taken will allow for the
Company to continue as a going concern. Such actions include the generation of
revenues from operations, additional private placement offerings, the exercise
of Common Stock purchase warrants and options, and continued efforts to reduce
costs.
Interim Financial Information
The consolidated financial statements and disclosures included herein for the
nine months ended March 31, 2000 and 1999 are unaudited. These financial
statements and disclosures have been prepared by the Company in accordance with
generally accepted accounting principles and reflect all adjustments consisting
of adjustments of a normal and recurring nature which, in the opinion of
management, are necessary for a fair presentation of the Company's consolidated
financial position and the results of its operations and cash flows.
F-7
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
Consolidation
The consolidated financial statements include the accounts of the Joint Venture
(Note 3). All significant intercompany accounts and transactions have been
eliminated in consolidation for the years ended June 30, 1999 and 1998,
respectively.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents represent all highly liquid investments with original
maturities of three months or less. Cash equivalents are comprised of a money
market fund and certificates of deposit.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or market.
Property and Equipment
Property and equipment are recorded at cost. Property and equipment consists of
control systems, which generate monthly transaction fees from usage and are
depreciated using the straight-line method over three years, and furniture and
vehicles, which are depreciated using the straight-line method over seven and
five years, respectively, for financial statement purposes and accelerated
methods for income tax reporting purposes.
Revenue Recognition
Revenue from the sale of equipment is recognized upon installation and customer
acceptance of the related equipment. License and transaction fee revenue is
recognized upon the usage of the Company's credit card activated control
systems.
F-8
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Practices (continued)
Research and Development
Research and development costs are charged to operations as incurred. Such
research and development costs amounted to approximately $198,000 and $199,000
for the years ended June 30, 1999 and 1998, respectively. These costs are
reflected in general and administrative and compensation expenses in the
accompanying financial statements.
Income Taxes
The Company provides for income taxes using the asset and liability approach
whereby deferred tax assets and liabilities are recorded based on the difference
between the tax bases of assets and liabilities and their carrying amounts for
financial reporting purposes. Such differences result from differences in the
timing of recognition by the Company of certain expenses, and the periods of
amortization and depreciation of certain assets.
Accounting for Stock Options
Financial Accounting Standards Board issued Statement No. 123 ("SFAS 123"),
Accounting for Stock-Based Compensation. SFAS 123 provides companies with a
choice to follow the provisions of SFAS 123 in determination of stock- based
compensation expense or to continue with the provisions of Accounting Principles
Board Opinion No. 25 ("APB 25"). The Company has elected to follow the
provisions of APB 25. Under APB 25, if the exercise price of the Company's stock
options equals or exceeds the market price of the underlying Common Stock on the
date of grant, no compensation expense is recognized. The effect of applying
SFAS 123 to the Company's stock-based awards results in net loss and net loss
per common share that are disclosed on a proforma basis in Note 12.
F-9
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Practices (continued)
Loss Per Common Share
Basic earnings per share is calculated by dividing net income (loss) by the
weighted average common shares outstanding for the period. Diluted earnings per
share is calculated by dividing net income (loss) by the weighted average common
shares outstanding of the period plus the dilutive effect of equity instruments.
No exercise of stock options, purchase rights, stock purchase warrants, or the
conversion of preferred stock and cumulative preferred dividends was assumed
during fiscal 1999 or 1998 because the assumed exercise of these securities
would be antidilutive.
Impact of Recent Accounting Pronouncements
During June 1997, the Financial Accounting Standards Board issued Statement No.
130, Reporting Comprehensive Income ("SFAS 130") and Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"). SFAS 130 requires financial statement reporting of all non-owner related
changes in equity for the periods presented. SFAS 131 requires disclosure about
revenue, earnings and other financial information pertaining to business
segments by which a company is managed, as well as factors used by management to
determine segments. Both SFAS 130 and SFAS 131 are effective for fiscal years
beginning after December 15, 1997. The adoption of SFAS 130 and SFAS 131 had no
material effect on the Company's results of operations or financial condition.
Fair Value of Financial Instruments
Financial Accounting Standards Board Statement No. 107, Disclosures About Fair
Value of Financial Instruments, defines the fair value of a financial instrument
as the amount at which the instrument could be exchanged in a current
transaction between willing parties. Cash and cash equivalents, accounts
receivable, other current assets, accounts payable and accrued expenses reported
in the consolidated balance sheets equal or approximate fair value due to their
short maturities. The fair value of the Company's Senior Notes approximates book
value as such notes are at market rates currently available to the Company.
F-10
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
3. Joint Venture
During September 1997, the Company entered into a five year Joint Venture
Agreement with Mail Boxes Etc. ("MBE") to operate under the name "MBE Express
Joint Venture" (hereinafter referred to as "Joint Venture") and exclusively sell
and market the Company's Business Express(R) product under the name MBE Business
Express(TM). Gross profits earned by the Joint Venture from sales on a National
Account level and sales referred to the Joint Venture by MBE franchisees are
split equally by the partners. Any sales generated by either of the partners
responsible for obligating the customer for the sale would receive 75% of the
gross profit and the other partner would receive 25% of the gross profit. The
agreement also allows the Company to have the option to directly sell its
Business Express products. All other revenues and expenses of the Joint Venture
are shared equally by the partners. The Joint Venture Agreement specifies that
if certain sales goals are not met by the Joint Venture, the Company may
terminate the exclusivity provisions of the agreement after the second year. The
Company manages the operations of the Joint Venture and handles all of its
administrative matters. The Joint Venture also specifies that it may be
terminated at any time by either partner if the other partner has breached any
material term or condition of the agreement; provided that the terminating
partner has allowed the other partner at least a sixty-day period to cure any
alleged breach.
During March 1998, the Joint Venture entered into an agreement with
International Business Machines Corporation ("IBM") whereby IBM agreed to be the
executional partner for certain aspects of the Joint Venture's business,
including project management services, asset procurement and inventory
financing, configuration and testing of equipment, site preparation,
installation, maintenance services, and asset management. Services provided
under this agreement commenced during the first quarter of fiscal 1999.
During 1998, the Joint Venture entered into an agreement with a hospitality
corporation ("Corporation") that represented various hotel chains. The agreement
provided for the Corporation to purchase a minimum of 100 MBE Business
Express(TM) units for installation. Through June 30, 1999, all but two
installations were completed. Revenues generated in connection with this
agreement represented 49% of the fiscal year 1999 consolidated revenues.
F-11
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
3. Joint Venture (continued)
During September 1998, MBE commenced a legal action against the Company in the
Superior Court of the State of California, (subsequently removed to the United
States District Court for the southern District of California), alleging that
195 terminals purchased by MBE were defective and a refund of $141,260 plus lost
profits (claimed to be several hundred thousand dollars) were sought by MBE. MBE
further claimed that it was not obligated to purchase 600 additional terminals
ordered in April 1998. The Company filed a counterclaim against MBE which
claimed numerous areas where MBE breached the Joint Venture Agreement, breached
its fiduciary responsibility, and trade libel. The counterclaim seeks recovery
from MBE of monetary damages caused by MBE's actions, including lost profits,
consequential damages and/or incidental damages and punitive damages for a total
amount in excess of $10 million. As of June 30, 1999, limited discovery has been
conducted by the parties and a trial date has not been set. Discovery is to be
completed by February 18, 2000. On May 14, 1999 the Company notified MBE that
the Company was terminating the Joint Venture Agreement, citing the numerous
breaches of the Joint Venture Agreement. The Company believes the claims made by
MBE are without merit and it will prevail in this matter. Accordingly, there has
been no provision recorded in the consolidated financial statements.
At June 30, 1999 and 1998 the Joint Venture recorded accounts payable to MBE of
approximately $64,000 and $64,000, respectively and approximately $141,000
(unaudited) at March 31, 2000 which principally represents amounts payable
for inventory and other expenditures paid by MBE on behalf of the Joint Venture.
4. Property and Equipment
Property and equipment consist of the following:
June 30 March 31
1999 1998 2000
-------- -------- ----------------
(Unaudited)
Control systems $410,983 $357,021 $637,724
Furniture and equipment 105,286 75,710 159,972
Vehicles 10,258 10,259 10,259
-------- -------- --------
526,527 442,990 807,955
Less accumulated depreciation 382,857 291,084 446,094
-------- -------- --------
$143,670 $151,906 $361,861
======== ======== ========
Depreciation expense was approximately $92,000 and $116,000 for the years ended
June 30, 1999 and 1998, respectively, and approximately $47,000 and $82,000 for
the nine months ended March 31, 2000 and 1999, respectively.
F-12
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
5. Accrued Expenses
Accrued expenses consist of the following:
March 31,
June 30 2000
1999 1998 (Unaudited)
--------- -------- -------------
Accrued product warranty costs $ 117,300 $102,520 $ 64,929
Accrued professional fees 101,000 76,000 303,547
Accrued compensation and related
sales commissions 88,135 79,147 55,644
Accrued interest - - 134,720
Accrued other 110,831 75,154 66,822
Accrued software license and
support costs 60,312 84,297 91,033
Advanced customer billings 20,970 13,525 12,828
--------- -------- --------
$ 498,548 $430,643 $729,523
========= ======== ========
6. Related Party Transactions
At June 30, 1999 and 1998, and March 31, 2000 approximately $84,000, $26,000 and
$429,000, respectively, of the Company's accounts payable were due to several
shareholders for various legal and technical services performed. During the
years ended June 30, 1999 and 1998 and for the nine months ended March 31, 2000,
the Company incurred approximately $381,000, $340,000 and $1,660,000
respectively, for these services.
7. Commitments
During May 1999, the Company entered into an agreement with IBM whereby IBM
agreed to be the executional partner for certain aspects of the Company's
business, including project management services, asset procurement,
configuration and testing of equipment, site preparation, installation,
maintenance services, and asset management. The agreement expands the original
agreement entered into with the Joint Venture (Note 3) and provides for an
increase from 1,000 to 5,000 locations and expanded the array of USA products
which are eligible for IBM installation. In connection with this agreement, the
Company has also entered into an inventory financing arrangement with IBM Credit
Corporation whereby IBM Credit Corporation granted the Company an equipment line
of credit of up to $1.5 million. Interest accrues on the outstanding line of
credit balance at 10% per annum. At June 30, 1999 and March 31, 2000,
respectively, $804,485 and $83,689 (unaudited) was outstanding.
F-13
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
7. Commitments (continued)
During November 1997, the Company entered into a new Employment and
Non-Competition Agreement through June 30, 2000 (the Employment Agreement) with
the Company's Chief Executive Officer, providing for a base annual salary of
$100,000. The Employment Agreement is automatically renewed annually thereafter
unless canceled by either the Chief Executive Officer or the Company. In
connection with the Employment Agreement, the Chief Executive Officer canceled
an aggregate of 436,500 shares of Common Stock held in escrow in accordance with
the terms of an agreement with Pennsylvania Securities Commission entered into
at the time of the initial public offering. The Employment Agreement also
granted the Chief Executive Officer in the event of a "USA Transaction," as
defined, irrevocable and fully vested rights equal to that number of shares of
Common Stock that when issued to him equals five percent (subsequently amended
to eight percent during fiscal year 1999) of all the then issued and outstanding
shares of the Company's Common Stock. The Chief Executive Officer is not
required to pay any additional compensation for such shares. The stock rights
have no expiration and are not affected by the Chief Executive Officer's
termination of employment.
The Company conducts its operations from various facilities under operating
leases. Rental expense under such arrangements was approximately $83,000,
$70,000 and $100,428 during the years ended June 30, 1999 and 1998 and for nine
months ended March 31, 2000 (unaudited), respectively. During the year ended
June 30, 1999, the Company entered into agreements to lease $29,576 of equipment
which was accounted for as capital leases. This computer equipment is included
in control systems in the accompanying consolidated financial statements. Lease
amortization of $25,076, $20,129 and $8,097 is included in depreciation expense
for the years ended June 30, 1999 and 1998, and for nine months ended March
31, 2000 (unaudited), respectively.
Future minimum lease payments subsequent to June 30, 1999 under capital and
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ----------
<S> <C> <C>
2000 $ 8,478 $139,000
2001 8,478 135,000
2002 8,478 133,000
2003 8,478 132,000
2004, thereafter 4,413 126,000
-------- --------
Total minimum lease payments 38,325 $665,000
Less amount representing interest 11,348 ========
--------
Present value of net minimum lease payments 26,977
Less current obligation under capital leases 4,393
--------
Obligation under capital leases, less current portion $ 22,584
========
</TABLE>
F-14
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
8. Income Taxes
At June 30, 1999 and 1998, the Company had net operating loss carryforwards of
approximately $15,115,000 and $11,231,000, respectively, to offset future
taxable income expiring through 2013. At June 30, 1999 and 1998, the Company
recorded a deferred tax asset of $6,013,100 and $4,905,000, respectively, which
were reduced by a valuation allowance of the same amount as the realization of
these deferred tax assets are not certain.
The deferred tax assets arose primarily from the use of different accounting
methods for financial statement and income tax reporting purposes as follows:
<TABLE>
<CAPTION>
June 30
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforwards $ 5,530,000 $ 4,384,000
Compensation expense on stock option re-pricing 207,000 222,000
Deferred research and development costs 143,000 207,000
Deferred pre-operating costs 900 18,000
Other temporary differences 132,200 81,000
----------- -----------
6,013,100 4,912,000
Deferred tax liabilities:
Depreciation - (7,000)
----------- -----------
Deferred tax asset, net 6,013,100 4,905,000
Valuation allowance (6,013,100) (4,905,000)
----------- -----------
$ - $ -
=========== ===========
</TABLE>
As of June 30, 1993, the timing and manner in which the Company can utilize
operating loss carryforwards and future tax deductions for capitalized items in
any year was limited by provisions of the Internal Revenue Code regarding
changes in ownership of corporations. The Company believes that such limitation
could have an impact on the ultimate realization of its carryforwards and future
tax deductions (generated through June 30, 1993). Cumulative losses generated
for income tax purposes after June 30, 1993 through June 30, 1999, may be
subject to similar limitation.
F-15
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
9. Senior Note Offering
During September 1998, the Company's Board of Directors authorized a $2,000,000
private placement offering (the "Senior Note Offering") of 200 units at a unit
price of $10,000. Each unit consisted of a 12% Senior Note in the principal
amount of $10,000, 1,500 1999-A Common Stock Purchase Warrants (subsequently
increased to 2,000 Warrants) and 1,000 shares of Series B Equity Participating
Preferred Stock (Series B). The Board of Directors also authorized the creation
of 200,000 shares of the Series B. Each 1999-A Common Stock purchase warrant
entitles the holder to purchase one share of Common Stock for $1.00 at any time
through December 31, 2001. During January 1999, the Board of Directors
authorized the reduction of the exercise price of the 1999-A Common Stock
purchase warrants to $.50 through December 31, 1999. Each share of the Series B
was automatically convertible into 4 shares of Restricted Common Stock at the
time of a "USA Transaction," as defined in the Offering agreement. During
January 1999, the Company's Board of Directors authorized the expanding of the
rights of the Series B holders providing for each share of Series B to convert
into 4 shares of Restricted Common Stock in the event of a reverse stock split.
During fiscal year 1999, the Company's Board of Directors authorized several
increases to the allowable size of the Senior Note Offering with a total
authorization of 500 units, $5,000,000 in gross proceeds, 1,000,000 1999-A
Common Stock Purchase Warrants and 500,000 shares of Series B Equity
Participating Preferred Stock.
During January 1999, the Chief Executive Officer purchased ten units of the
Senior Note Offering for $100,000. The Board of Directors also approved the
Chief Executive Officer's commitment to purchase an additional ten units for
$100,000 which will be funded by his foregoing salary from April 1, 1999 through
June 30, 2000. At June 30, 1999 and March 31, 2000, $84,296 and $31,446,
(unaudited), respectively, of this amount is included in subscriptions
receivable.
The Senior Note Offering closed on June 23, 1999, generating net proceeds of
$4,106,440 through the sale of 466.8 units, the issuance of 933,600 1999-A
Common Stock purchase warrants and the issuance of 466,800 shares of Series B.
In connection with the reverse stock split approved by the Company's
shareholders at the Annual Meeting on May 27, 1999 (Note 11), the 466,800 shares
of Series B were converted into 1,867,200 shares of restricted Common Stock
effective June 7, 1999. The estimated fair value of the debt issue costs
consisting of the 1999-A Common Stock purchase warrants and the Restricted
Common Stock issued in connection with this Offering in the amount of $2,350,558
have been allocated to paid in capital. The resulting debt discount is being
amortized over the term of the Senior Notes. Accumulated debt discount
amortization at June 30, 1999 and March 31, 2000 was $23,497 and $718,354,
(unaudited), respectively.
F-16
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
10. Preferred Stock
The Preferred Stock authorized may be issued from time to time in one or more
series, each series with such rights, preferences or restrictions as determined
by the Board of Directors. Each share of Series A Preferred Stock shall have the
right to one vote and is convertible at any time into one share of Common Stock
(1.2 shares from March 31, 1997 to December 31, 1997). Each share of Common
Stock entitles the holder to one voting right. Series A Convertible Preferred
Stock provides for an annual cumulative dividend of $1.50 per share payable to
the shareholders of record in equal parts on February 1 and August 1 of each
year. Cumulative unpaid dividends at June 30, 1999 and 1998 and March 31, 2000
amounted to $3,328,442, $2,442,650 and $3,991,449, respectively. Cumulative
unpaid dividends are convertible into common shares at $10.00 per common share
at the option of the shareholder ($8.30 from March 31, 1997 to December 31,
1997). During the years ended June 30, 1999 and 1998 and the nine months ended
March 31, 2000, certain holders of the Preferred Stock converted 33,259, 392,969
and 45,550 shares, respectively, into 33,029, 466,453 and 45,550 shares of
Common Stock, respectively. Certain of these shareholders also converted
cumulative preferred dividends of $116,661, $1,503,867 and $267,070,
respectively, into 11,564, 178,964 and 26,707 shares of Common Stock during the
years ended June 30, 1999 and 1998 and the nine months ended March 31, 2000,
respectively. The Series A Preferred Stock may be called for redemption at the
option of the Board of Directors at any time on and after January 1, 1998 for a
price of $11.00 per share plus payment of all accrued and unpaid dividends. No
such redemption has occurred as of June 30, 1999 or March 31, 2000. In the event
of any liquidation, the holders of shares of Series A Preferred Stock issued
shall be entitled to receive $10.00 for each outstanding share plus all
cumulative unpaid dividends. If funds are insufficient for this distribution,
the assets available will be distributed ratably among the preferred
shareholders.
11. Common Stock Transactions
On May 27, 1999 the Company's shareholders approved a Plan of Recapitalization
and amendment to the Company's Articles of Incorporation to effect a 1-for-10
reverse split of Common Stock. The reverse stock split became effective on June
7, 1999. All Common Stock per share amounts, and related Common Stock
equivalents have been restated to reflect the reverse split in the accompanying
consolidated financial statements.
The shareholders also approved an increase in the number of authorized shares of
undesignated Series Preferred Stock from 1,200,000 to 1,800,000 and an increase
in the number of authorized shares of Series A Preferred Stock from 787,591 to
900,000.
F-17
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
11. Common Stock Transactions (continued)
During July 1998, the Company's Board of Directors authorized a $700,000 private
placement offering of 70 units at a unit price of $10,000. Each unit includes
2,000 shares of Convertible Preferred Stock and 5,000 1998-B Common Stock
purchase warrants at an exercise price of $1.50 through January 1, 1999 and
$4.00 per warrant thereafter. The Company terminated the offering on August 17,
1998, with 27.8 units sold generating net proceeds of $234,485 ($278,000 less
offering costs of $43,515). During January 1999, the Company's Board of
Directors reduced the exercise price of the 1998-B warrants to $1.00 per warrant
through March 31, 1999. During fiscal year 1999, 134,000 warrants were exercised
generating gross proceeds of $134,000. At June 30, 1999, there were 5,000 1998-B
Common Stock purchase warrants outstanding from this offering.
During January 1998, the Company's Board of Directors authorized a $750,000
private placement offering of 75 units at a unit price of $10,000. Each unit
included 2,000 shares of Convertible Preferred Stock and 5,000 1998-A Common
Stock purchase warrants at an exercise price of $1.50 through June 30, 1998 and
$4.00 thereafter through March 5, 2003. The Company terminated this offering
during February 1998 selling all 75 units and generating net proceeds of
$701,510 ($750,000 less offering costs of $48,490). During fiscal year 1998,
371,000 1998-A Common Stock purchase warrants were exercised at $1.50 per
warrant generating gross proceeds of $556,500. At June 30, 1999, there were
4,000 1998-A Common Stock purchase warrants outstanding from this offering.
During June 1997, the Company closed on a private placement offering of
Convertible Debentures (the Placement) resulting in net proceeds to the Company
of $451,169. The Placement was issued pursuant to Regulation S of the Securities
Act of 1933 to five qualified purchasers, as defined, (Purchasers). The
Placement was convertible by the Purchasers into Common Stock at any time after
45 days from issuance (August 7, 1997) and through the Placement's maturity of
June 1, 2002 at the option of the Purchaser. The conversion or redemption rate
(hereinafter referred to as conversion rate) was equal to the lesser of 100% of
the average closing bid price of the Common Stock for the five trading days
immediately preceding June 23, 1997, or 65% of the average closing bid price of
the Common Stock for the five trading days immediately preceding the date prior
to the conversion or redemption date. Upon maturity (unless converted or
redeemed prior thereto), the Placement would be automatically converted into
shares of Common Stock at the conversion rate. During fiscal year 1998, the
entire Placement was converted (at varying prices) into 191,574 common shares.
Certain affiliates of the placement agent
F-18
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
11. Common Stock Transactions (continued)
were issued non-detachable Common Stock purchase warrants, exercisable
immediately, to purchase up to 200,000 shares of the Company's Common Stock at
$2.00 per warrant at any time through June 22, 2002. Through June 30, 1999,
90,000 of these warrants were exercised generating gross proceeds of $180,000.
At June 30, 1999, there were 110,000 purchase warrants outstanding.
In connection with a March 1997 private placement offering, the Company issued
160,000 1997 Common Stock purchase warrants at an exercise price of $2.00 per
warrant through October 31, 1997 and $4.00 per warrant thereafter through
February 28, 2002. Through June 30, 1999, 158,500 warrants were exercised at
$2.00 per warrant generating gross proceeds of $317,000. At June 30, 1999, 1,500
of the 1997 Common Stock purchase warrants were outstanding.
In connection with a November 1996 private placement offering, the Company
issued 37,400 1996-B Common Stock purchase warrants at an exercise price of
$2.00 per share through October 31, 1997 and $3.00 per warrant thereafter
through February 28, 2002. Through June 30, 1999, 33,400 warrants were exercised
at $2.00 per warrant generating gross proceeds of $66,800.
At June 30, 1999, 4,000 of the 1996-B Common Stock purchase warrants were
outstanding.
In connection with a 1996 private placement offering, the Company issued 520,000
1996 Common Stock purchase warrants at an exercise price of $4.00 through
December 31, 1996 and $5.00 per warrant thereafter through May 31, 2001. Through
June 30, 1999, 433,200 warrants were exercised generating gross proceeds of
$922,900. At June 30, 1999, 86,800 1996 Common Stock purchase warrants were
outstanding.
In connection with a 1995 private placement offering, the Company issued 141,400
1995 Common Stock purchase warrants at an exercise price of $2.50 through
October 1997 and $5.00 per warrant thereafter through January 31, 2001. Through
June 30, 1999, 74,100 warrants were exercised at $2.50 per warrant generating
gross proceeds of $185,250. At June 30, 1999, 67,300 1995 Common Stock purchase
warrants were outstanding.
At June 30, 1999 and 1998, the Company had outstanding 11,740 and 15,280 Common
Stock purchase rights, respectively. These Common Stock purchase rights, issued
in 1993, allow the holder to purchase shares of the Company's Common Stock at
$10.00 per share and are exercisable through June 30, 2000. During fiscal year
1999, the Company's Board of Directors authorized a reduction in the exercise
price from $10.00 per share to $1.00 per share from January 21, 1999 through
March 31, 1999.
F-19
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
12. Stock Options
The Company's Board of Directors has granted options to employees and
consultants to purchase shares of Common Stock at or above fair market value.
All options granted have 5 year terms and vest and become fully exercisable on
the schedule established by the contract which granted the option. During April
1998, the Company's Board of Directors authorized the reduction in the exercise
price of 189,600 options from $2.50-$4.50 per share to $.50-$2.00 per share. As
the new exercise prices were below the fair market value of the Company's common
stock on the date of repricing, the Company recorded a non-cash charge to
compensation expense of approximately $555,000 during fiscal year 1998.
The following table summarizes all stock option activity:
Exercise
Common Shares Under Price
Options Granted Per Share
------------------- ----------
Balance at June 30, 1997 397,100 $ .50-$5.00
Granted 30,000 $ 4.50-$5.00
Exercised (7,000) $ .50
--------- ------------
Balance at June 30, 1998 420,100 $ .50-$5.00
Granted 542,000 $ 2.00
Exercised (45,000) $ 1.00
--------- ------------
Balance at June 30, 1999 917,100 $ .50-$5.00
Granted (unaudited) 120,000 $ 2.00
Exercised (unaudited) (10,000) $ 1.50
Cancelled (unaudited) (35,833) $ 1.50-$4.50
--------- ------------
Balance at March 31, 2000 (unaudited) 991,267 $ .50-$5.00
========= ============
The price range of the outstanding and exercisable common stock options at June
30, 1999 is as follows:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Option Remaining Weighted Average
Exercise Options Contract Life Exercise Options Exercise
Prices Outstanding (Yrs.) Price Exercisable Price
-------- ----------- ------------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.50 5,000 2.02 $ 0.50 5,000 $ 0.50
$ 1.50 132,100 1.31 $ 1.50 132,100 $ 1.50
$ 2.00 549,500 4.76 $ 2.00 346,167 $ 2.00
$ 2.50 131,500 2.76 $ 2.50 131,500 $ 2.50
$ 4.50 84,000 2.34 $ 4.50 84,000 $ 4.50
$ 5.00 15,000 2.55 $ 5.00 15,000 $ 5.00
------- --------------- -------
917,100 $ 0.50-$5.00 713,767
======= =============== =======
</TABLE>
The price range of the outstanding and exercisable common stock options at
March 31, 2000 is as follows:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Option Remaining Weighted Average
Exercise Options Contract Life Exercise Options Exercise
Prices Outstanding (Yrs.) Price Exercisable Price
-------- ----------- ------------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.50 5,000 1.26 $ 0.50 5,000 $ 0.50
$ 1.50 117,100 0.71 $ 1.50 117,100 $ 1.50
$ 2.00 656,167 4.26 $ 2.00 476,167 $ 2.00
$ 2.50 116,500 0.89 $ 2.50 116,500 $ 2.50
$ 4.50 81,500 1.78 $ 4.50 81,500 $ 4.50
$ 5.00 15,000 1.78 $ 5.00 15,000 $ 5.00
--------- --------------- -------
991,267 $ 0.50-$5.00 811,267
========= =============== =======
</TABLE>
F-20
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
12. Stock Options (continued)
Pro forma information regarding net loss and net loss per common share
determined as if the Company is accounting for stock options granted under the
fair value method of SFAS 123 is as follows:
<TABLE>
<CAPTION>
June 30 March 31
1999 1998 2000
------------- ------------- ----------------
(unaudited)
<S> <C> <C> <C>
Net loss applicable to common shares as reported under APB 25:
$ (4,654,077) $ (5,322,847) $(6,927,767)
Stock option expense per SFAS 123 (620,236) (391,704) (329,062)
------------ ------------ -----------
Pro forma net loss $ (5,274,313) $ (5,714,551) $(7,256,829)
============ ============ ===========
Loss per common share as reported $ (1.07) $ (1.51) $ (0.76)
Pro forma net loss per common share $ (1.21) $ (1.62) $ (0.79)
</TABLE>
The fair value for the Company's stock options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for fiscal years 1999 and 1998; risk-free interest
rate of 6.0% and 5.5%, respectively; an expected life of 2 years; no expected
cash dividend payments on common stock and volatility factors of the expected
market price of the Company's common stock, based on historical volatility of
1.364 and 0.793, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. As noted above, the Company's stock options are vested over an
extended period. In addition, option models require the input of highly
subjective assumptions including future stock price volatility. Because the
Company's stock options have characteristics significantly different from those
of traded options, and because changes in the subjective assumptions can
materially affect the fair value estimates, in management's opinion, the
Black-Scholes model does not necessarily provide a reliable measure of the fair
value of the Company's stock options. The Company's pro forma information
reflects the impact of the reduction in price of certain stock options.
F-21
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
13. Retirement Plan
During September 1998, the Company adopted a Savings and Retirement Plan (the
Plan) which allows employees who have attained the age of 21 and have completed
one year of service to make voluntary contributions up to a maximum of 15% of
their annual compensation, as defined in the Plan. The Plan does not provide for
any matching contribution by the Company, however, the Board of Directors may
authorize, at its sole discretion, Company contributions to the Plan. During
fiscal year 1999 and 1998, there were no contributions made to the Plan by the
Company.
14. Subsequent Events
During July 1999, the Company's Board of Directors granted a new director 10,000
options to purchase Common Stock of the Company at $2.00 per share. The Board
also granted to two consultants a total of 250,000 Common Stock purchase
warrants at $2.50 per share in connection with financial and public relations
services. During August 1999, the Company's Board of Directors issued to various
employees and consultants a total of 377,800 shares of Common Stock at $2.00 per
share for services rendered or to be rendered in fiscal year 2000 in lieu of
cash compensation.
Subsequent to June 30, 1999 136,000 1999-A Common Stock purchase warrants were
exercised at $.50 per warrant, generating gross proceeds of $68,000.
15. Events (Unaudited) Subsequent to the Date of the Auditors' Report
During October 1999, the Company's Board of Directors authorized that at any
time through December 31, 2001, each holder of the 12% Senior Notes shall have
the right to convert all or any portion of the principal amount of their Note
into shares of the Company's Common Stock at $2.50 per share. As of March 31,
1999, $525,000 of Senior Notes were converted into 210,000 shares of Common
Stock.
During October 1999, the Company's Board of Directors authorized a private
placement offering for up to $1,500,000. Each $10,000 unit in the offering
consisted of 10,000 shares of the Company's restricted Common Stock and 10,000
1999-B Common Stock purchase warrants. Each 1999-B Common Stock purchase warrant
is exercisable at $2.00 per share. The warrants expire on March 31, 2000 or such
later date as may be determined by the Company. During November 1999 and January
2000, the Company's Board of Directors authorized two increases in the aggregate
amount of the pending private placement offering from $1,500,000 to $3,560,000.
Through December 12, 1999, the Company sold 356 units generating gross proceeds
of $3,560,000 and has issued 3,560,000 1999-B Common Stock purchase warrants.
During October 1999, the Company's Board of Directors reduced the exercise price
of the outstanding Common Stock purchase rights from $10.00 to $2.00 per share
through January 31, 2000. Additionally, through January 31, 2000, the 1995 and
1996 Common Stock Purchase Warrants were reduced from $5.00 to $2.00; the 1996-B
warrants were reduced from $3.00 to $2.00 and the 1997, 1998-A and 1998-B
warrants were reduced from $4.00 to $2.00. Additionally, the Company's Board of
Directors reduced the exercise price from $3.00 to $2.00 of the outstanding
Common Stock purchase warrants issued to I.W. Miller Group, Inc., to purchase up
to 50,000 shares of Common Stock. The reduction is effective through January 31,
2000.
During the quarter ended September 30, 1999, 136,000 1999-A Warrants were
exercised at $.50 per share, resulting in gross proceeds to the Company of
$68,000. From October 1, 1999 through December 31, 1999, an additional 627,700
1999-A Common Stock purchase warrants were exercised at $.50 per warrant
generating gross proceeds of $313,850.
During November 1999, the Company issued fully vested Common Stock options to
purchase an aggregate of 90,000 shares of Common Stock to its executive
officers. Each option is exercisable at $2.00 per share, which was at or above
the fair market value on the grant date, and any time within 5 years from the
issuance date.
During November 1999, the Company's Board of Directors authorized the issuance
of 150,000 shares of fully vested Common Stock to members of the law firm that
currently represents the Company in connection with the pending litigation with
Mail Boxes Etc. in lieu of a cash payment for such services.
From January 1, 2000 through March 31, 2000, the following occurred: (i) the
holder of Consultant Warrants exercised such Warrants at $2.50 per share for
34,000 shares of Common Stock; (ii) the holders of options exercised options at
$1.50 per share for 10,000 shares of Common Stock and at $2.50 per share for
6,500 shares of Common Stock; (iii) the holders of the 1999-A Warrants exercised
such warrants at $.50 per share for 146,900 shares of Common Stock; (iv) the
holders of the 1999-B Warrants exercised such warrants at $2.00 per share for
107,750 shares of Common Stock; and (v) the holders of the Senior Notes
converted an aggregate of $525,000 principal amount thereof at the rate of $2.50
per share for a total of 210,000 shares of Common Stock. The Company has
registered under the Act all of such shares of Common Stock for resale by the
holder thereof.
<PAGE>
In February, March and April 2000, the Company sold 1,300,000 shares of
Common Stock at $2.00 per share pursuant to a private placement under Rule 506
promulgated under the Act. The Company has registered under the Act all of such
shares of Common Stock for resale by the holder thereof.
In April 2000, the Company permanently reduced the exercise price of
the remaining Consultant Warrants from $2.50 to $1.00 per share.
On January 7, 2000 the Company filed a First Amended Answer and
Counterclaims to the legal action described in Note 3. As set forth above, the
Company has denied the allegations set forth in MBE's original complaint of
September 1998. In addition to the counterclaims previously set forth, the
Company has stated additional claims against MBE, including that MBE
misrepresented to USA that MBE's franchisees would be capable of selling the
Joint Venture's products. The new counterclaims seek relief from MBE for
intentional and negligent misrepresentation and seek recovery of an unspecified
amount of money damages in excess of $10 million dollars as well as punitive
damages. The Company has eliminated its demand for injunctive relief regarding
the Joint Venture Agreement and ICW Project as described above because the Joint
Venture has now been terminated.
On January 7, 2000, MBE filed a First Amended Complaint. In addition to
the allegations set forth in MBE's original complaint, MBE has stated numerous
additional claims against the Company, including that the Company failed to
develop for MBE a working ICW Project as promised, the Company owes MBE $392,760
under the Joint Venture Agreement, the Company has breached the Joint Venture
Agreement, and the Company's technology was not viable and "public proof" as
promised. The new claims seek relief from the Company for intentional
misrepresentation, breach of the Joint Venture Agreement, breach of express and
implied warranty, breach of fiduciary duty, and trade libel, and seek recovery
of an unspecified amount of money damages in excess of $10 million dollars as
well as punitive damages.
On January 27, 2000 MBE filed a motion to dismiss three claims of the
Company's amended counterclaims against MBE. Subsequent to this filing, MBE has
withdrawn a portion of its motion to dismiss that relates to one of the
Company's claims. By court order dated May 3, 2000, MBE's motion to dismiss was
denied in part and granted in part. None of the Company's claims against the
Company was dismissed.
Both parties have requested a jury trial. By court order, discovery is
required to be completed by March 20, 2001, and the jury trial is scheduled to
commence on June 18, 2001.
On June 26, 2000, MBE filed its Answer to the Company's First Amended
Counterclaims in which it denied the Company's counterclaims and asserted
various affirmative defenses.
By Court order, a mandatory settlement conference is scheduled for
August 9, 2000.
The Company believes that the claims of MBE are without merit and that
it will prevail in this matter. Accordingly, there continues to be no provision
recorded for this action in the accompanying consolidated financial statements.
During July 2000, the Company received and accepted subscription
agreements from five investors to sell an aggregate of 2,200,000 shares of
restricted Common Stock. The purchase price for the stock is $1.50 per share or
an aggregate of $3,300,000. In July 2000, the purchase price was reduced to
$1.00 per share or an aggregate of $2,200,000. Pursuant to the agreements, full
payment for the shares by the investors is to be made to the Company on or
before August 31, 2000. Through July 20, 2000, none of the purchase price has
been paid to the Company.
During June 2000, the Company reduced the exercise price of all of the
outstanding Common Stock purchase warrants (other than the 1999-A Warrants) to
$1.50 per share through July 31, 2000. In July 2000, the Company further reduced
the exercise price to $1.00 and authorized the Chairman of the Company to extend
such date for up to sixty additional days or until September 30, 2000.
During January 2000, the expiration date of each outstanding 1999-B
Common Stock purchase warrant was extended from March 31, 2000 to June 1, 2000;
provided, however, that if a holder of the 1999-B Warrants shall have exercised
any of such holder's 1999-B Warrants on or prior to June 1, 2000, such holder
shall have until the close of business on November 1, 2000 to exercise the
lesser of (i) all of the holder's remaining 1999-B Warrants, or (ii) that number
of the holder's remaining 1999-B Warrants which equal the number of 1999-B
Warrants already exercised by such holder on or before June 1, 2000. During May
2000, the June 1, 2000 expiration date was extended to June 30, 2000, and during
June 2000, the June 30, 2000 expiration date was extended until July 31, 2000.
In July 2000, the November 1, 2000 expiration date was extended until March 31,
2001. The Chairman of the Company was authorized to extend the July 31, 2000
expiration date for up to sixty additional days or until September 30, 2000, and
the exercise price was reduced to $1.00 per share through July 31, 2000 (subject
to up to a sixty day extension).
F-22
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 24. Indemnification of Officers and Directors.
Section 1746 of the Pennsylvania Business Corporation Law of 1988, as
amended ("BCL"), authorizes a Pennsylvania corporation to indemnify its
officers, directors, employees and agents under certain circumstances against
expenses and liabilities incurred in legal proceedings involving such persons
because of their holding or having held such positions with the corporation and
to purchase and maintain insurance of such indemnification. The Company's Bylaws
substantively provide that the Company will indemnify its officers, directors,
employees and agents to the fullest extent provided by Section 1746 of the BCL.
Section 1713 of the BCL permits a Pennsylvania corporation, by so
providing in its By-laws, to eliminate the personal liability of a director for
monetary damages for any action taken unless the director has breached or failed
to perform the duties of his office and the breach or failure constitutes
self-dealing, willful misconduct or recklessness. In addition, no such
limitation of liability is available with respect to the responsibility or
liability of a director pursuant to any criminal statute or for the payment of
taxes pursuant to Federal, state or local law. The Company's By-laws eliminate
the personal liability of the directors to the fullest extent permitted by
Section 1713 of the BCL.
Item 25. Other Expenses of Issuance and Distribution.
The following is an itemized statement of the estimated amounts of all
expenses payable by the Registrant in connection with the registration of the
Common Stock, other than underwriting discounts and commissions.
Securities and Exchange Commission - Registration Fee . $ 843.92
Printing and Engraving Expenses . . . . . . . . . . . . $ 4,156.08
Accounting Fees and Expenses. . . . . . . . . . . . . . $ 7,500.00
Legal Fees and Expenses . . . . . . . . . . . . . . . . $ 7,500.00
----------
Total . . . . . . . . . . . . . . . . . . $20,000.00
==========
Item 26. Recent Sales of Unregistered Securities.
During the three years immediately preceding the date of the filing of
this Registration Statement, the following securities were issued by the Company
without registration under the Securities Act of 1933, as amended ("Act"):
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<PAGE>
I. Private Placements.
During July and August 1998, the Company sold 27.8 units at $10,000.
Each unit consisted of 2,000 shares of Preferred Stock and 5,000 1998-B Common
Stock Purchase Warrants. An aggregate of 55,600 shares of Preferred Stock and
139,000 1998-B Common Stock Purchase Warrants were sold to 20 accredited
investors. The offering was sold only to accredited investors, involved no
general solicitation or advertising, and was therefor exempt from registration
under Rule 506 of Regulation D promulgated under the Act.
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<PAGE>
From September 1998 through June 23, 1999, the Company sold 461.8 units
at $10,000 each, for an aggregate of $4,618,000. Each unit consisted of a
$10,000 principal amount 12% Senior Note, 2,000 1999-A Common Stock Purchase
Warrants, and 1,000 shares of Series B Equity Participating Preferred Stock. The
offering was sold to 222 accredited investors, and did not involve any general
advertising or solicitation, and was therefore exempt from registration under
Rule 506 of Regulation D promulgated under the Act.
In June 1999, pursuant to the terms of the Series B Preferred Stock,
each share of Series B Preferred Stock was exchanged for 4 shares of Common
Stock, or an aggregate of 1,867,200 shares of Common Stock. Such exchange was
exempt from registration under the Act pursuant to Section 3(a)(9) of the Act.
The 1,867,200 shares of Common Stock are restricted securities as defined under
Rule 144 promulgated under the Act.
In June 1999, the Company issued 43,400 shares of Common Stock to
Harmonic Research, Inc., a broker-dealer, as part of its compensation in
connection with its assisting the Company to raise monies in a private placement
offering. The Company also issued to Harmonic Research, Inc. 9,400 1999-A Common
Stock Purchase Warrants. The shares and warrants are restricted securities as
such term is defined in Rule 144 promulgated under the Act and were issued
pursuant to Section 4(2) thereof.
In June 1999, the Company issued to Robert Flaherty 4,000 shares of
Common Stock in connection with public relations services rendered to the
Company. Such shares were exempt from registration under Section 4(2)
promulgated under the Act.
In June 1999, the Company issued 10,000 shares of Common Stock to Rick
Joshi in consideration of consulting services performed on behalf of the
Company. The shares were esxempt from registration pursuant to Section 4(2)
promulgated under the Act.
In July 1999, the Company issued to I. W. Miller Group, Inc. fully
vested warrants to acquire up to 100,000 shares, 50,000 of which are exercisable
at $2.00 per share and 50,000 of which are exercisable at $3.00 per share. The
warrants are exercisable at any time for two years following issuance. The
warrants were issued to Miller pursuant to Rule 506 under the Act, and the
shares of Common Stock underlying the Warrants will be issued pursuant to such
exemption.
In July 1999, the Company issued to Harmonic Research, Inc. fully
vested warrants to acquire up to 150,000 shares of Common Stock at $2.50 per
share. The warrants are exercisable at any time for two years following
issuance. The warrants were issued pursuant to Rule 506 under the Act, and the
shares of Common Stock underlying the Warrants will be issued pursuant to such
exemption.
In August 1999, the Company issued 3,000 shares of Common Stock to
Robert Flaherty in consideration of public relations services performed on
behalf of the Company. The shares were exempt from registration under Rule 701
promulgated under the Act.
During October, November and December, 1999, the Company sold 356 units
at $10,000 each, for an aggregate of $3,560,000. Each unit consisted of
10,000 shares of Common Stock and 10,000 1999-B Common Stock Purchase Warrants.
The offering was sold to 196 accredited investors, and did not involve any
general advertising or solicitation, and was therefore exempt from registration
under Rule 506 of Regulation D promulgated under the Act.
During February, March and April 2000, the Company sold an aggregate of
1,300,000 shares of Common Stock at $2.00 per share for a total of $2,600,000.
The offering was sold to 22 accredited investors, and did not involve any
general advertising or solicitation, and was therefore exempt from registration
under Rule 506 of Regulation D promulgated under the Act.
In June 2000, the Company sold an aggregate of 2,200,000 shares of
Common Stock at $1.50 per share for a total of $3,300,000. In July 2000, the
purchase price was reduced to $1.00 per share or an aggregate of $2,200,000.
Pursuant to the subscription agreements payment is due on or before August 31,
2000. The offering was sold to 5 accredited investors, and did not involve any
general advertising or solicitation, and was therefore exempt from registration
under Rule 506 of Regulation D promulgated under the Act, or in the alternative
were exempt from registration pursuant to Registration S promulgated under the
Act.
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<PAGE>
II. Stock Options
In September 1997, the Company issued to RAM Group, a consultant,
options to purchase up to 5,000 shares of Common Stock at $5.00 per share.
In December 1997, the Company issued to Joseph Donahue options to
purchase up to 5,000 shares of Common Stock at $4.50 per share.
In December 1997, the Company issued Phillip A. Harvey options to
purchase up to 5,000 shares of Common Stock at $4.50 per share.
In April 1998, the Company issued to Stephen Herbert options to
purchase up to 5,000 shares of Common Stock at $4.50 per share.
In April 1998, the Company issued to Haven Brock Kolls options to
purchase up to 5,000 shares of Common Stock at $4.50 per share.
In April 1998, the Company issued to Leland P. Maxwell options to
purchase up to 5,000 shares of Common Stock at $4.50 per share.
In June 1999, the Company issued options to purchase an aggregate of
470,000 shares of Common Stock at $2.00 per share to its executive officers, as
follows: George R. Jensen, Jr. - 180,000 options; Stephen P. Herbert - 110,000
options; Haven Brock Kolls - 100,000 options; Leland Maxwell - 40,000 options;
Michael Lawlor - 20,000 options; and Joseph Donahue - 20,000 options.
In June and July 1999, the Company issued options to purchase an
aggregate of 70,000 shares of Common Stock at $2.00 per share to its outside
directors, as follows; Steven Katz - 10,000 options; Edwin R. Boynton - 10,000
options; Peter Kapourelos - 10,000 options; William Sellers - 10,000 options;
Henry Smith - 10,000 options; William Van Alen, Jr. - 10,000 options; and
Douglas M. Lurio - 10,000 options.
In June 1999, the Company issued options to purchase an aggregate of
12,000 shares of Common Stock at $2.00 per share to six employees as follows:
Margaret Broadwell - 5,000 options; Cecil Ledesma - 2,000 options; Amy Thigpen -
2,000 options; Vivian Stroud - 1,000 options; Jim Tierney - 1,000 options; and
Dave DeMedio - 1,000 options.
In August 1999, the Company issued to Michael Lawlor options to
purchase an aggregate of 20,000 shares of Common Stock at $2.00 per share.
In November 1999, the Company issued fully vested options to purchase
an aggregate of 90,000 shares of Common Stock to its executive officers as
follows: Stephen P. Herbert - 45,000 options; Haven Brock Kolls - 30,000
options; and Leland Maxwell - 15,000 options. Each option is exercisable at
$2.00 per share.
The issuance of all of the foregoing options was made in reliance upon
the exemption provided by Section 4(2) of the Act as all of the options were
issued to officers, directors, employees or consultants to the Company, each of
such issuances were separate transactions not part of any plan, and none of the
issuances involved any general solicitation or advertising.
III. Common Stock-For Cash.
In September 1997, options to purchase 7,000 shares of Common Stock at
$.50 per share were exercised by the holders thereof.
In December 1999, warrants to purchase 100,000 shares of Common Stock
at $2.00 per share were exercised by the holder thereof.
In February 2000, warrants to purchase 34,000 shares of Common Stock at
$2.50 per share were exercised by the holder thereof.
In February 2000, options to purchase 10,000 shares of Common Stock at
$1.50 per share were exercised by the holder thereof.
In February 2000, options to purchase 6,500 shares of Common Stock at
$2.50 per share were exercised by the holders thereof.
All of the foregoing issuances were made in reliance upon the exemption
provided by Section 4(2) of the Act as all of the issuances were to existing
securityholders of the Company, the securities issued contained restrictive
legends, and the issuance did not involve any general solicitation or
advertising.
II-4
<PAGE>
Exhibit
Number Description
-------------------------------------------------------
3.1 Articles of Incorporation of Company filed on January
16, 1992 (Incorporated by reference to Exhibit 3.1 to
Form SB-2 Registration Statement No. 33-70992).
3.1.1 First Amendment to Articles of Incorporation of the
Company filed on July 17, 1992 (Incorporated by
reference to Exhibit 3.1.1 to Form SB-2 Registration
Statement No. 33-70992).
3.1.2 Second Amendment to Articles of Incorporation of the
Company filed on July 27, 1992 (Incorporated by
reference to Exhibit 3.1.2 to Form SB-2 Registration
Statement No. 33-70992).
3.1.3 Third Amendment to Articles of Incorporation of the
Company filed on October 5, 1992 (Incorporated by
reference to Exhibit 3.1.3 to Form SB-2 Registration
Statement No. 33-70992).
3.1.4 Fourth Amendment to Articles of Incorporation of the
Company filed on October 18, 1993 (Incorporated by
reference to Exhibit 3.1.4 to Form SB-2 Registration
Statement No. 33-70992).
3.1.5 Fifth Amendment to Articles of Incorporation of the
Company filed on June 7, 1995(Incorporated by reference
to Exhibit 3.1 to Form SB-2 Registration Statement No.
33-98808).
3.1.6 Sixth Amendment to Articles of Incorporation of the
Company filed on May 1, 1996 (Incorporated by reference
to Exhibit 3.1.6 to Form SB-2 Registration Statement
No. 333-09465).
3.1.7 Seventh Amendment to Articles of Incorporation of the
Company filed on March 24, 1997 (Incorporated by
reference to Exhibit 3.1.7 to Form SB-2 Registration
Statement No. 333-30853).
3.1.8 Eighth Amendment to Articles of Incorporation of the
Company filed on July 5, 1998 (Incorporated by reference
to Exhibit 3.1.8 to Form 10-KSB for fiscal year ended
June 30, 1998).
3.1.9 Ninth Amendment to Articles of Incorporation of the
Company filed on October 1, 1998. (Incorporated by
reference to Exhibit 3.1.9 to Form SB-2 Registration
Statement No. 333-81591).
3.1.10 Tenth Amendment to Articles of Incorporation of the
Company filed on April 12, 1999. (Incorporated by
reference to Exhibit 3.1.10 to Form SB-2 Registration
Statement No. 333-81591).
3.1.11 Eleventh Amendment to Articles of Incorporation of the
Company filed on June 7, 1999. (Incorporated by
reference to Exhibit 3.1.11 to Form SB-2 Registration
Statement No. 333-81591).
3.2 By-Laws of the Company (Incorporated by reference to
Exhibit 3.2 to Form SB-2 Registration Statement No.
33-70992).
4.1 Warrant Agreement dated as of June 21, 1995 between the
company and American Stock Transfer and Trust Company
(Incorporated by reference to Exhibit 4.1 to Form SB-2
Registration Statement N. 33-98808, filed October 31,
1995).
4.2 Form of Warrant Certificate (Incorporated by reference to
Exhibit 4.2 to Form SB-2 Registration Statement, No.
33-98808, filed October 31, 1995).
4.3 1996-B Warrant Agreement dated as of December 27, 1996
between the Company and American Stock Transfer and Trust
Company (Incorporated by reference to Exhibit 4.1 to Form
SB-2 Registration Statement No. 333-30853).
4.4 Form of 1996-B Warrant Certificate (Incorporated by
reference to Exhibit 4.2 to Form SB-2 Registration
Statement No. 333-30853).
4.5 Form of 1997 Warrant (Incorporated by reference to
Exhibit 4.1 to Form SB-2 Registration Statement No.
333-38593, filed February 4, 1998).
<PAGE>
4.6 Form of 12% Senior Note (Incorporated by reference to
Exhibit 4.6 to Form SB-2 Registration Statement No.
333-81591).
4.7 Warrant Certificate of I.W. Miller Group, Inc.
(Incorporated by reference to Exhibit 4.7 to Form SB-2
Registration Statement No. 333-84513, filed August 4,
1999)
4.8 Warrant Certificate of Harmonic Research, Inc.
(Incorporated by reference to Exhibit 4.8 to Form SB-2
Registration Statement No. 333-84513, filed August 4,
1999)
**5.1 Opinion of Lurio & Associates, P.C.
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<PAGE>
10.1 Employment and Non-Competition Agreement between the
Company and Adele Hepburn dated as of January 1, 1993
(Incorporated by reference to Exhibit 10.7 to Form SB-2
Registration Statement No. 33-70992).
10.2 Robert L. Bartlett common Stock Options dated as of July
1, 1993 (incorporated by reference to Exhibit 10.9 to
Form SB-2 Registration Statement No. 33-70992).
10.3 Edward J. Sullivan Common Stock Options dated as of July
1, 1993 (Incorporated by reference to Exhibit 10.10 to
Form SB-2 Registration Statement No. 33-70992).
10.4 Keith L. Sterling Common Stock Options dated July 1,
1993 (Incorporated by reference to Exhibit 10.11 to
Form SB-2 Registration Statement No. 33-70992).
10.5 Adele Hepburn Common Stock Options dated as of July 1,
1993 (Incorporated by reference to Exhibit 10.12 to
Form SB-2 Registration Statement No. 33-70992).
10.6 Gregory C. Rollins Common Stock Options dates as of
August 23, 1993 (Incorporated by reference to Exhibit
10.13 to Form SB-2 Registration Statement No. 33-70992).
10.7 Certificate of Appointment of American Stock Transfer &
Trust Company as Transfer Agent and Registrar dated
October 8, 1993 (Incorporated by reference to Exhibit
10.23 to Form SB-2 Registration Statement No.
33-70992).
10.8 Employment and Non-Competition Agreement between the
Company and H. Brock Kolls dated as of May 1, 1994
(Incorporated by reference to Exhibit 10.32 to Form
SB-2 Registration Statement No. 33-70992).
10.8.1 First Amendment to Employment and Non-Competition
Agreement between the Company and H. Brock Kolls dated
as of May 1, 1994 (Incorporated by reference to Exhibit
10.13.1 to Form SB-2 Registration Statement No.
333-09465).
10.8.2 Third Amendment to Employment and Non-Competition
Agreement between the Company and H. Brock Kolls dated
February 22, 2000 (Incorporated by reference to Exhibit
10.3 to Form S-8 Registration Statement No. 333-34106).
10.9 Agreement of Lease dated March 16,1994, by and between
the Company and G.F. Florida Operating Alpha, Inc.
(Incorporated by reference to Exhibit 10.33 to Form
SB-2 Registration Statement No. 33-70992).
10.10 Megan N. Cherney Common Stock Options dated as of April
1, 1994 (Incorporated by reference to Exhibit 10.41 to
Form SB-2 Registration Statement No. 33-70992).
10.11 H. Brock Kolls Common Stock Options dated as of May 1,
1994 (Incorporated by reference to Exhibit 10.42 to
Form SB-2 Registration Statement No. 33-70992).
10.11.1 H. Brock Kolls Common Stock Options dated as of March
20, 1996 (Incorporated by reference to Exhibit 10.19 to
Form SB-2 Registration Statement No. 33-70992)
10.12 Barry Slawter Common Stock Options dated as of August
25, 1994 (Incorporated by reference to Exhibit 10.43 to
Form SB-2 Registration Statement No. 33-70992).
10.13 Employment and Non-Competition Agreement between the
Company and Michael Lawlor dated June 7, 1996
(Incorporated by reference to Exhibit 10.28 to Form
SB-2 Registration Statement No. 333-09465).
10.13.1 First Amendment to Employment and Non-Competition
Agreement between the Company and Michael Lawlor dated
February 22, 2000 (Incorporated by reference to Exhibit
10.5 to Form S-8 Registration Statement No. 333-34106).
II-6
<PAGE>
10.14 Michael Lawlor Common Stock Option Certificate dated as
of June 7, 1996 (Incorporated by reference to Exhibit
10.29 to Form SB-2 Registration Statement
No.333-09465).
10.15 Employment and Non-Competition Agreement between the
Company and Stephen P. Herbert dated April 4, 1996
(Incorporated by reference to Exhibit 10.30 to Form
SB-2 Registration Statement No. 333-09465).
10.15.1 First Amendment to Employment and Non-Competition
Agreement between the Company and Stephen P. Herbert
dated February 22, 2000 (Incorporated by reference to
Exhibit 10.2 to Form S-8 Registration Statement No.
333-34106).
10.16 Stephen P. Herbert Common Stock Option Certificate
dated April 4, 1996 (Incorporated by reference to
Exhibit 10.31 to Form SB-2 Registration Statement No.
333-09465).
10.17 RAM Group Common Stock Option Certificate dated as of
August 22, 1996 (Incorporated by reference to Exhibit
10.34 to Form SB-2 Registration No. 33-98808).
10.18 RAM Group Common Stock Option Certificate dated as of
November 1, 1996 (Incorporated by reference to Exhibit
10.35 to Form SB-2 Registration No. 33-98808).
10.19 Philip A. Harvey Common Stock Option Certificate dated
as of November 1, 1996 (Incorporated by reference to
Exhibit 10.36 to Form SB-2 Registration No. 33-98808).
10.20 Joseph Donahue Common Stock Option Certificate dated as
of September 2, 1996 (Incorporated by reference to
Exhibit 10.37 to Form SB-2 Registration No. 33-98808).
10.21 Employment and Non-Competition Agreement between the
Company and Leland P. Maxwell dated February 24, 1997
(Incorporated by reference to Exhibit 10.39 to Form
SB-2 Registration No. 33-98808)
10.21.1 Second Amendment to Employment and Non-Competition
Agreement between the Company and Leland P. Maxwell dated
February 22, 2000 (Incorporated by reference to Exhibit
10.4 to Form S-8 Registration Statement No. 333-34106)
10.22 Leland P. Maxwell Common Stock Option Certificate dated
February 24, 1997 (Incorporated by reference to Exhibit
10.40 to Form SB-2 Registration No. 33-98808).
10.23 Letter between the Company and GEM Advisers, Inc.
signed May 15, 1997 (Incorporated by reference to
Exhibit 10.1 to Form 8-K filed on May 22, 1997).
10.24 Business Express Agreement between the Company and
1217909 Ontario Inc. dated May 20, 1997 (Incorporated
by reference to Exhibit 10.42 to Form 8-K filed on May
22, 1997).
10.25 H. Brock Kolls Common Stock Option Certificate dated as
of June 9, 1997 (Incorporated by reference to Exhibit
10.43 to Form SB-2 Registration Statement No.
333-30853).
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<PAGE>
10.26 Stephen Herbert Common Stock Option Certificate dated
as of June 9, 1997 (Incorporated by reference to
Exhibit 10.44 to Form SB-2 Registration Statement No.
333-30853).
10.27 Keith Sterling Common Stock Option Certificate dated as
of June 9, 1997 (Incorporated by reference to Exhibit
10.45 to Form SB-2 Registration Statement No.
333-30853).
10.28 Michael Feeney Common Stock Option Certificate dated as
of June 9, 1997 (Incorporated by reference to Exhibit
10.46 to Form SB-2 Registration Statement No.
333-30853).
10.29 Joint Venture Agreement dated September 24, 1997 between
the Company and Mail Boxes Etc. (Incorporated by
reference to Exhibit 10.47 to Form 10-KSB filed on
September 26, 1997).
10.30 Employment and Non-competition Agreement between the
Company and George R. Jensen, Jr. dated November 20, 1997
(Incorporated by reference to Exhibit 10.1 to Form 8-K
filed on November 26, 1997).
10.31.1 First Amendment to Employment and Non-Competition
Agreement between the Company and George R. Jensen, Jr.,
dated as of June 17, 1999.
10.31.2 Second Amendment to Employment and Non-Competition
Agreement between the Company and George R. Jensen, Jr.,
dated February 22, 2000 (Incorporated by reference to
Exhibit 10.1 to Form S-8 Registration Statement No.
333-34106).
10.31 Agreement between the Compapny and Promus Hotels, Inc.
dated May 8, 1997 (incorporated by reference to Exhibit
10.49 to Form SB-2 Registration Statement No. 333-38593,
filed on February 4, 1998).
10.32 Agreement between the Company and Choice Hotels
International, Inc. dated April 24, 1997 (Incorporated by
reference to Exhibit 10.50 to Form SB-2 Registration
Statement No. 333-38593, filed on February 4, 1998).
10.33 Agreement between the Company and PNC Merchant Services
dated July 18, 1997 (Incorporated by reference to Exhibit
10.51 to Form SB-2 Registration Statement No. 333-38593,
filed on February 4, 1998).
10.34 Separation Agreement between the Company and Keith L.
Sterling dated April 8, 1998 (Incorporated by reference
to Exhibit to Exhibit 10.1 to Form 10-QSB filed May 12,
1998).
10.35 Phillip A. Harvey Common Stock Option Certificate dated
as of April 22, 1999 (Incorporated by reference to
Exhibit 10.35 to Form SB-2 Registration Statement No.
333-81591).
10.36 Consulting Agreement between Ronald Trahan and the
Company dated November 16, 1998 (incorporated by
reference to Exhibit 28 to Registration Statement No.
333-67503 on Form S-8 filed on November 18, 1998).
10.37 Consulting Agreement between Mason Sexton and the Company
dated March 10, 1999 (incorporated by reference to
Exhibit 28 to Registration Statement No. 333-74807 on
Form S-8 filed on March 22, 1999).
10.38 Financial Public Relations Agreement between the Company
and I.W. Miller Group, Inc. dated August 1, 1999
(incorporated by reference to Exhibit 10.38 to
Registration Statement No. 333-84513 on Form SB-2 filed
on August 4, 1999).
10.39 Consulting Agreement between Harmonic Research, Inc. and
the Company dated August 3, 1999 (incorporated by
reference to Exhibit 10.39 to Registration Statement
No. 333-84513 on Form SB-2 filed on August 4, 1999).
<PAGE>
10.40 Subscription Agreement between the Company and Venture
Capital USA dated June 19, 2000 (incorporated by
reference to Exhibit 10.1 to Report on Form 8-K (No.
333-70992) filed June 29, 2000).
10.41 Subscription Agreement between the Company and Angles Co.
Limited dated June 9, 2000 (incorporated by reference to
Exhibit 10.2 to Report on Form 8-K (No. 333-70992) filed
June 29, 2000).
10.42 Subscription Agreement between the Company and Clipper
Holdings Limited dated June 19,2000 (incorporated by
reference to Exhibit 10.3 to Report on Form 8-K (No. 333-
70992) filed June 29, 2000).
10.43 Subscription Agreement between the Company and DF
Investment dated June 9, 2000 (incorporated by reference
to Exhibit 10.4 to Report on Form 8-K (No. 333-70992)
filed June 29, 2000).
10.44 Subscription Agreement between the Company and
Metropolitan Partners Ltd. dated June 19, 2000
(incorporated by reference to Exhibit 10.5 to Report on
Form 8-K (No. 333-70992) filed June 29, 2000).
**23.1 Consent of Ernst & Young LLP.
**27.1 Power of Attorney
-------------------------------------------------------------------
** -- Filed herewith.
II-8
<PAGE>
Item 28. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in
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<PAGE>
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
For purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual report pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 that is incorporated by reference
in this registration statement shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing this Form SB-2 and has duly caused this
Registration Statement on Form SB-2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in Wayne, Pennsylvania, on July 24,
2000.
USA TECHNOLOGIES, INC.
By: /s/ George R. Jensen, Jr.
------------------------------------
George R. Jensen, Jr.,
Chairman and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints George R. Jensen, Jr. and Leland P.
Maxwell, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto such
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them or their or his substitutes, may lawfully do or cause
to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been duly signed below by the following persons
in the capacities and dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ George R. Jensen, Jr. Chairman of the Board, July 24, 2000
---------------------------- and Chief Executive
George R. Jensen, Jr. Officer (Principal
and Chief Executive
Officer) Director
/s/ Leland P. Maxwell Vice President, Chief July 24, 2000
---------------------------- Financial Officer
Leland P. Maxwell Treasurer (Principal
Accounting Officer)
/s/ Stephen P. Herbert President, Chief July 24, 2000
---------------------------- Operating Officer,
Stephen P. Herbert Director
/s/ William W. Sellers Director July 24, 2000
---------------------------
William W. Sellers
Director July __, 2000
----------------------------
Henry B. duPont Smith
/s/ William L. Van Alen, Jr. Director July 24, 2000
----------------------------
William L. Van Alen, Jr.
Director July __, 2000
----------------------------
Steven Katz
/s/ Douglas M. Lurio Director July 24, 2000
----------------------------
Douglas M. Lurio
Director July __, 2000
----------------------------
Edwin R. Boynton
</TABLE>
II-11
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
<S> <C>
5.1 Opinion of Lurio & Associates
23.1 Consent of Independent Auditors
24.1 Power of Attorney (appears as part of signature page)
</TABLE>
----------------
II-12
